APPELLATE TRIBUNAL INLAND REVENUE (PAKISTAN)
SPECIAL BENCH, KARACHI

ITA No. 1082/KB/2015	ITA No. 132/KB/2015	ITA No. 112/KB/2018
Tax Year – 2009	Tax Year – 2011	Tax Year – 2014
u/s 122(5A)	u/s 122(5A)	u/s 122(5A)

ITA No. 1083/KB/2015	ITA No. 133/KB/2015	ITA No. 1/KB/2019
Tax Year – 2010	Tax Year – 2012	Tax Year – 2014
u/s 122(5A)	u/s 122(5A)	u/s 122(5A)

ITA No. 1476/KB/2018	ITA No. 1455/KB/2018	ITA No. 742/KB/2018
Tax Year – 2010	Tax Year – 2012	Tax Year – 2015
u/s 122(5A)	u/s 122(5A)	u/s 122(5A)

ITA No. 1453/KB/2018	ITA No. 899/KB/2014	ITA No. 1031/KB/2019
Tax Year – 2010	Tax Year – 2013	Tax Year – 2016
u/s 122(5A)	u/s 122(1)	u/s 122(5A)

ITA No. 1454/KB/2018	ITA No. 1274/KB/2018	ITA No. 1032/KB/2019
Tax Year – 2011	Tax Year – 2013	Tax Year – 2017
u/s 122(5A)	u/s 122(1)	u/s 122(5A)

M/s. JS Bank Ltd., Karachi. ………… Appellant

V e r s u s

The CIR, Legal Zone, LTO, Karachi. …………. Respondent

Appellant by : Mr. Asif Haroon, FCA

Respondent by : Mr. Kashif Hafeez, DR

ITA No. 1262/KB/2015	ITA No. 298/KB/2015	ITA No. 795/KB/2018
Tax Year – 2009	Tax Year – 2012	Tax Year – 2015
u/s 122(5A)	u/s 122(5A)	u/s 122(5A)

ITA No. 1263/KB/2015	ITA No. 620/KB/2018	ITA No. 1225/KB/2019
Tax Year – 2010	Tax Year – 2013	Tax Year – 2016
u/s 122(5A)	u/s 122(1)	u/s 122(5A)

ITA No. 297/KB/2015	ITA No. 1479/KB/2018	ITA No. 1226/KB/2019
Tax Year – 2011	Tax Year – 2013	Tax Year – 2017
u/s 122(5A)	u/s 122(1)	u/s 122(5A)

ITA No. 1477/KB/2018	ITA No. 1691/KB/2018
Tax Year – 2011	Tax Year – 2014
u/s 122(5A)	u/s 122(5A)

ITA No. 1478/KB/2018	ITA No. 317/KB/2018
Tax Year – 2012	Tax Year – 2014
u/s 122(5A)	u/s 122(5A)

The CIR, Legal Zone, LTO, Karachi. …………… Appellant

V e r s u s

M/s. JS Bank Ltd., Karachi. …………. Respondent

Appellant by : Mr. Asif Haroon, FCA

Respondent by : Mr. Kashif Hafeez, DR

Date of Hearing : 24-01-2022

Date of Order : 31-01-2022

O R D E R

M. M. AKRAM, JUDICIAL MEMBER: The titled cross-appeals have been filed by the appellant taxpayer bank and the revenue department against the impugned Appellate Orders passed by the Commissioner Inland Revenue (Appeals), Karachi for tax years 2009 to 2017. The facts of the case and the issues involved in all these appeals are the same, identical and interlinked, therefore, we intend to dispose of all these appeals through this common order. The issues involved in all these appeals are summarized in the following manner for determination:

S. No	ISSUES	GOA No.	ITA No.	Tax Year	Appellant
1	Provision for advances is to be allowed on the gross or net amount of advances?	3 3	297 / 2015 298 / 2015	2011 2012	Department Department
2	Dividend income taxable at the reduced rate specified under rule 6 and not under section 18(4) of the Ordinance.	4 4 2	297 / 2015 298 / 2015 317 / 2018	2011 2012 2014	Department Department Department
3	Interest on concessional loans- disallowed.	5 5 3 7 8	297 / 2015 298 / 2015 620 / 2018 317 / 2018 742 / 2018	2011 2012 2013 2014 2015	Department Department Department Department Bank
4	Disallowance of accrued markup on account of non-withholding - under section 21(c) of the Ordinance.	6 6	297 / 2015 298 / 2015	2011 2012	Department Department
5	Provision against other assets	6	742 / 2018	2015	Bank
6	Actuarial loss disallowed being provision.	7 9 & 11	1031 / 2019 1032 / 2019	2016 2017	Bank Bank
7	Provision against diminution in value of the investment.	2 2	1225 / 2019 1226 / 2019	2016 2017	Department Department
8	Donation.	4 5 8	317 / 2018 742 / 2018 1032 / 2019	2014 2015 2017	Department Bank Bank
9	Amortization of Goodwill allowable under section 24 of the Ordinance.	2 & 3 3 & 4 2 & 3 2 & 3 2 & 3 2 & 3 3 & 4 5 5 & 11	1082/ 2015 1083 / 2015 132 / 2015 133 / 2015 899 / 2014 112 / 2018 742 / 2018 1031 / 2019 1032 / 2019	2009 2010 2011 2012 2013 2014 2015 2016 2017	Bank Bank Bank Bank Bank Bank Bank Bank Bank
10	Super Tax under section 4B (i) Adjustment of b/f losses for computing income subject to super tax. (ii) Cannot be levied through section 122(5A).	10	742 / 2018	2015	Bank
11	WWF	4 & 5 5, 6 & 7 4, 5 & 6	1082 / 2015 133 / 2015 899 / 2014	2009 2012 2013	Bank Bank Bank
12	Surcharge under sec 4A: (i) Not applicable under the Seventh Schedule. (ii) Proration of income.	4	132 / 2015	2011	Bank
13	Turnover for the purpose of Minimum Tax under section 113.	5 3 4 5 4 11	1083 / 2015 1263 / 2015 133 / 2015 1274 / 2018 112 / 2018 742 / 2018	2010 2010 2012 2013 2014 2015	Bank Department Bank Bank Bank Bank
14	Amendment of assessment under section 122(5A).	1 to 3 1 to 3	1031/KB 1032/KB	2016 2017	Bank Bank
15	Disallowance of the following expenses:
	- Repair & Maintenance exp under section 21(n).	8 8 8	297 / 2015 298 / 2015 317 / 2018	2011 2012 2014	Department Department Department
	- Contract Wages u/s 21(c).	9 9 4	297 / 2015 298 / 2015 620 / 2018	2011 2012 2013	Department Department Department
16	Minimum tax, not leviable due to Gross loss (computation of Gross loss to made in light of the decision of ATIR in case of KASB).	2 10 10	1083/2015 297 / 2015 298 / 2015	2010 2011 2012	Bank Department Department
17	Disallowance of SWWF.	4 4	1031 / 2019 1032 / 2019	2016 2017	Bank Bank
18	Legal - Appeal Effect of set aside issues.	2 2 2	1453 / 2018 1454 / 2018 1455 / 2018	2010 2011 2012	Bank Bank Bank
19	Legal - CIR(A) does not have the power to remand back issues.	1 to 3 1 to 3 1 to 3 1 to 4 1 & 2 1 to 3 1 to 7 1 & 2 1 to 3	1476 / 2018 1477 / 2018 1478 / 2018 1274 / 2018 620 / 2018 1479 / 2018 1691 / 2018 1 / 2019 795 / 2018	2010 2011 2012 2013 2013 2013 2014 2014 2015	Department Department Department Bank Department Department Department Bank Department
20	Error in Computation of gross advances.	7	1032 / 2019	2017	Bank
21	Refund Adjustment.	11 10 & 12 2 & 4 10	297 / 2015 317 / 2018 795 / 2018 1032 / 2019	2011 2014 2015 2017	Department Department Department Bank
22	Adjustment of Brought forward capital losses.	3 & 9 2 8	317 / 2018 742 / 2018 1031 / 2019	2014 2015 2016	Department Bank Bank
23	Reversal of Provision not allowed.	2 2 2 & 7 2 & 7 5 & 6 7 6 6	1262 / 2015 1263 / 2015 297 / 2015 298 / 2015 317 / 2018 742 / 2018 1031 / 2019 1032 / 2019	2009 2010 2011 2012 2014 2015 2016 2017	Department Department Department Department Department Bank Bank Bank
24	Assets acquired in satisfaction of the claim.	9 3 3	742 / 2018 1225 / 2019 1226 / 2019	2015 2016 2017	Bank Department Department
25	Turnover for the purpose of Minimum Tax under sec 113.	10	298 / 2015	2012	Department
26	Credit of Minimum Tax paid (in excess of normal tax) not allowed.	9	1031 / 2019	2016	Bank
27	Credit of withholding taxes.	11 3	317 / 2018 795 / 2018	2014 2015	Department Department

2. This case came up for hearing on 24.01.2022. The learned AR for the taxpayer Mr. Asif Haroon, FCA argued the case at some length. He also placed on record the issue-wise summary of all the appeals along with supporting case laws relied upon by him. On the contrary, the learned DR Mr. Kashif Hafeez for the department, in response, also placed on record the brief summary of his submissions.

3. We have heard the learned representatives of both parties at length and have perused the records available with us. However, to keep the order simple and for the sake of brevity, we discuss relevant legal and factual arguments put forth by both the parties and decide the issue after examining the impugned orders, submissions of both sides, and case laws cited. The above appeals are decided in the following manner:

LEGAL GROUND RELATING TO POWER OF ADDITIONAL COMMISSIONER IR TO AMEND THE ASSESSMENT UNDER SECTION 122(5A) OF THE ORDINANCE

Tax Year 2009 – Ground No. 1 [ITA NO. 1082/KB/2015]

Tax Year 2010 – Ground No. 1 [ITA NO. 1083/KB/2015]

Tax Year 2011 – Ground No. 1 [ITA NO. 132/KB/2015]

Tax Year 2012 – Ground No. 1 [ITA NO. 133/KB/2015]

Tax Year 2014 – Ground No. 1 [ITA NO. 112/KB/2018]

Tax Year 2015 – Ground No. 1 [ITA NO. 742/KB/2018]

Tax Year 2016 – Ground No. 2 & 3 [ITA NO. 1031/KB/2019]

Tax Year 2017 – Ground No. 2 & 3 [ITA NO. 1032/KB/2019]

4. In all these grounds, the learned AR for the appellant has taken an objection for invoking the provisions of section 122(5A) of the Income Tax Ordinance, 2001 (hereinafter referred to as “the Ordinance”) that the returns so filed by the appellant were treated to be an assessment orders for all the tax years issued by the Commissioner Inland Revenue in terms of section 120(1)(b) of the Ordinance, therefore, according to him, the provision of section 122(5A) had to be invoked by the Commissioner Inland Revenue himself and not by the Additional Commissioner IR (Add CIR). This issue is no longer res-Integra. Reliance may be on the case titled Pakistan Tobacco Company Ltd, Islamabad Vs Additional Commissioner, Unit-II, LTU, Islamabad, (2013 PTD 747). This judgment was subsequently upheld by the Hon’ble Supreme Court of Pakistan in CP No.1664-1665/2009 dated 11.09.2009. Thus, this contention of the learned AR is not sustainable in law. Further contended that the issuance of notices under section 122(5A) of the Ordinance by the Add CIR does not align with the law laid down by this Tribunal in the case reported as (2016) 113 Tax 53 wherein it was observed that fishing and roving inquiry in the garb of section 122(5A) is to be seen in the context of two mandatory prescribed conditions referred to in the said provision. However, while arguing the case, the learned AR had not referred any portion of the show cause notice which was contrary to the law laid down by this Tribunal in the foregoing judgment. Therefore, this contention of the AR is baseless, uncalled for, and without merit is rejected.

LEGAL GROUNDS RELATING TO SCOPE AND CONDUCT OF AN AUDIT

TAX YEAR 2013–Ground No.1 [ITA No. 899/KB/2014] [Taxpayer appeal]

5. Return of income filed by the Bank for the tax year 2013 was selected for audit under section 177 of the Ordinance by the Commissioner Inland Revenue, Zone-I, LTU, Karachi vide letter No. CIR/Z-III/LTU/2013-2014 dated 10-03-2014. Audit proceedings were initiated through Information Document Request (IDR) dated 11-03-2014 followed by the Show-Cause Notice dated 23-05-2014 issued under Section 122(9) of the Ordinance. The said proceedings later on concluded through order bearing D.C No. 01/176 dated 05-08-2014 passed under section 122(1) / (5) of the Ordinance.

6. The learned AR at the very outset stated that the order passed by the assessing officer is not sound on legal and factual footings as it lacks the mandatory legal requirements of conducting an audit under section 177 of the Ordinance and subsequently passing the amended assessment order under section 122(5) of the Ordinance. The AR stated that the officer as per law was bound to properly confront the audit objections through audit observation report before assuming the jurisdiction under section 122 of the Ordinance, which he failed to do so. In support of the arguments, the AR also placed reliance on the judgment of Hon’ble High Court of Sindh dated 25-08-2021 in ITRA No. 32 of 2020 titled The Commissioner Inland Revenue Vs Mahvash and Jahangir Siddique Foundation, wherein the Hon’ble Sindh High Court in a similar case disposed of Department’s reference application with the following remarks:

“6. The statutory pre requisites of the audit report and a reasonable opportunity of hearing are crystal clear and suffer from no ambiguity. Notwithstanding the foregoing, even if there was any doubt, the same had to be resolved in favour of the taxpayer. A Division Bench of this Court observed as much in Citibank, and in PTV (per Mian Saqib Nisar J.), the august Supreme Court settled principles in such regard and enunciated inter alia that there is no intendment or equity about tax and the provisions of a taxing statute must be applied as they stand; the provision creating a tax liability must be interpreted strictly in favor of the taxpayer and against the revenue authorities; any doubts arising from the interpretation of a fiscal provision must be resolved in favor of the taxpayer; and if two reasonable interpretations are possible, the one favoring the taxpayer must be adopted.

7. In the present case the respondent had been selected for audit and the department had every right to conduct such an exercise, within the remit of the law. The record demonstrates that no audit report was issued to the taxpayer containing audit observations and that no reasonable opportunity of a hearing was provided. Admittedly, this was done “considering the time constrain (sic) for completion of audit proceedings for the tax year 2011 being barred by limitation”. Such conduct has rightly been deprecated by the learned tribunal and we find ourselves in concurrence therewith.”

7. Besides above, the AR also referred to the judgment of Hon’ble Lahore High Court reported as 2017 PTD 986 = (115 TAX 84) in the case of M/s. Nestle Pakistan Limited and the judgment of the Tribunal in the case of M/s. A.O Clinic reported as 120 TAX 125. The AR stated that it is a settled principle that when the law requires certain things is to be done in a particular manner, it has to be done in that manner. Reliance was placed on 2002 PTD 877 (SC).

Findings:

8. It can be seen from the above-referred judgment of Sindh High Court and combined reading of the provisions of law that after selection of the case for audit under sections 177, the audit shall be conducted as per procedure given in section 177 of the Ordinance. Under sub-section (5) of section 177, the Commissioner shall conduct an audit of income tax affairs, call for records or documents including books of accounts maintained under the Ordinance for conducting an audit of income tax affairs of the taxpayer. After obtaining the record of a taxpayer under sub-section (5) of section 177, the Commissioner shall conduct an audit of the income tax affairs of the taxpayer. After completion of the audit, the Commissioner under sub-section (6) of section 177 shall after obtaining the taxpayer’s explanation on all the issues raised in the audit, issue an audit report. After issuance of the audit report, the Commissioner may proceed if he considered necessary to amend the assessment order under section 122 of the Ordinance. The language of sub-section (6) of section 177 is expressed, explicit and mandatory to the effect that the Commissioner proceeds to amend the deemed assessment only after obtaining taxpayer’s explanation on all the issues raised in the Audit Report. Hence it is very clear that no proceedings for amendment of deemed assessment can be initiated without obtaining taxpayer’s explanation on the Audit Observations. The judgment of M/s. Nestle Pakistan Limited was subsequently upheld by the Hon’ble Supreme Court in the case titled CIR Vs Allah Din Steel & Re-rolling Mills, (2018 PTD 1444) wherein it observed as follows:-

“16. A perusal of the statutory landscape makes it clear that the provisions of sections 177 and 214C of the Ordinance; section 25 of the Act, 1990, and section 46 of the Act, 2005 provide a mechanism and roadmap which is required to be followed by the Taxation Officer/Auditor. In terms of section 177 of the Ordinance, the Commissioner can call for the record or documents for conducting the audit of the tax affairs of a person, provided he furnishes reasons to do so. Such reasons must be communicated to the Taxpayer. He can also seek explanations from the Taxpayer on issues raised during the audit in terms of section 177 of the Ordinance. It is only if he is convinced that the explanation furnished by the Taxpayers is not satisfactory, he may proceed to amend the assessment under section 122 of the Ordinance, after giving the Taxpayer an opportunity to defend him. We are therefore of the view that the statutory framework together with the overarching umbrella of constitutional guarantees furnish adequate and sufficient safeguards to the Taxpayer where there is a possibility of overstepping by the Tax authorities.” (Emphasis supplied)

It is quite obvious from the judgments referred above that the department is under legal and statutory obligation before further proceeding for amendment process contemplates under section 122 of the Ordinance to obtain explanation/ clarifications on all the issues raised during an audit from the taxpayer which in the instant case was not done. After the judgment of the Hon’ble Supreme Court cited above, the provision of sub-section (6) was amended and new sub-section (6A) of section 177 inserted through Finance Act, 2019 which expressly mandate that after completion of the audit, the Commissioner shall after obtain taxpayer’s explanation on all the issues raised in the audit, issue an audit report. After issuance of the audit report, the Commissioner may proceed if he considered necessary to amend the assessment order under section 122 of the Ordinance.

9. Similarly, the second proviso to sub-section (6A) of section 114 of the Ordinance gives safeguard, privilege, and the waiver of penalty to the extent of 75% to the taxpayer if he deposits the amount of tax as pointed out by the Commissioner during the audit proceedings or before the issuance of notice under sub-section (9) of section 122 along with default surcharge and twenty-five percent of the penalties leviable under the Ordinance along with the revised return. If such an opportunity during the audit proceedings or before issuance of notice under section 122(9) of the Ordinance is not given to the taxpayer, it would be seriously deprived of its statutory right enshrined in the said proviso which is not permissible under any canon of interpretation. It is settled principle of interpretation of the statutes that every word appearing in a section is to be given effect to and no word is to be rendered or surplus so was held by the Apex Court in the cases of (i) In the matter of Reference by the President of Pakistan under Article 162 of the Constitution of Islamic Republic of Pakistan PLD 1957 SC (Pak.) 219, (ii) Muhammadi Steamship Company Ltd Vs CIT, (Central) Karachi (PLD 1966 SC 828), (iii) M/s V. N. Lakhani and Company vs M. V. Lakatoi Express and 2 others (PLD 1994 SC 894) and (iv) Director General Intelligence and Investigation FBR Vs Sher Andaz and 20 Others (2010 SCMR 1746).

10. For the foregoing reasons, both the orders passed by the lower authorities for the tax year 2013 are annulled being void ab-initio and without jurisdiction. It is an immutable principle of law that defective assumption/exercise of jurisdiction by the authorities is incurable. Reliance may be placed on Director General Intelligence and Investigation FBR Vs Sher Andaz and 20 Others, (2010 SCMR 1746), Director General Intelligence and Investigation and others Vs M/s AL-Faiz Industries (Pvt.) Limited and others, PTCL 2008 CL 337(SC) and Collector, Sahiwal and 2 others Vs Muhammad Akhtar, (1971 SCMR 681). As a result, the appeal of the taxpayer is accepted.

COMPUTATION OF 1% / 5% ON “GROSS ADVANCES” OR “NET ADVANCES”

Tax Year 2011 - Ground No.3 [ITA No. 297/KB/2015] [Department Appeal]

Tax Year 2012 – Ground No. 3 [ITA No. 298/KB/2015] [Department Appeal]

Tax Year 2017 - Ground No. 7 [ITA No. 1032/KB/2019] [Taxpayer Appeal]

11. The AR argued that the claim of taxpayer bank of the 1% / 5% of “gross advances” is strictly in accordance with Rule 1(c) of the Seventh Schedule to the Ordinance which clearly stipulates that deduction should be allowed on 1% / 5% of "total advances". The relevant part of Rule 1(c) of the Seventh Schedule is reproduced below:

“Provisions for advances and off-balance sheet items shall be allowed up to a maximum of 1% of total advances, and provisions for advances and off-balance sheet items shall be allowed at 5% of total advances for consumers and small and medium enterprises (SMEs) (as defined under the State Bank Prudential Regulations) provided a certificate from the external auditor is furnished by the banking company to the effect that such provisions are based upon and are in line with the Prudential Regulations. Provisioning in excess of 1% of total advances for a banking company and 5% of total advances for consumers and small and medium enterprises (SMEs) would be allowed to be carried over to succeeding years:”

The AR further submitted that Income Tax Ordinance, 2001 and Income Tax Rules, 2002 as well as the Circulars issued thereunder do not define the term ‘Total’. In the absence of any specific definition following three sources are available to determine the definition of any term under the law viz:

(i) ordinary dictionary meaning;

(ii) any other compatible law; and

(iii) reference of the term in another context of the taxation law.

Dictionary meaning of the term ‘total’ has been defined as under:-

As per Chambers 21^st Century Dictionary

Total means

“The whole or complete amount”

Black’s Law Dictionary

Total means

1. Whole; not divided; full; complete.

2. Utter; absolute.”

Similarly, The Concise Oxford Dictionary provides “Total” means

“1. a product of addition.

2. an entire quantity: amount.”

It has been stated by the learned AR that the Department method of computing 1% or 5% on ‘net’ advance has already been disapproved by this Tribunal in taxpayer’s case for the tax year 2013 through an order dated 02-07-2015 bearing ITA No. 924/KB/2014 with the following observations:

“After having perused the relevant provision of law i.e. Sub-Rule-(1)(c) of the Seventh Schedule it is amend declared that as per this provision the advances of the balance sheet to be allowed while also learned CIR(A) has placed reliance on the reported judgment of (2012) 106 TAX 317 (Trib) (2013) 107 TAX 389 (Trib). In the above judgment, (ATIR) has allowed a 1% provision on the gross advances. The learned D.R failed to rebut the above cases law relied upon by the CIR(A). In this way, we see no reason to deviate from the impugned findings it is, therefore, confirmed. Resulted in obvious departmental appeal fails.”

Besides above, the AR also referred to the various other judgments of the ATIR including 109 TAX 85, 107 TAX 248, an unreported judgment of Faysal Bank Ltd (ITA No.823/KB/2012), National Bank Ltd (ITA No.394/KB/2006), UBL (ITA No. 324/KB/2011) and My Bank (ITA No.389/KB/2015). The relevant extracts of some judgments relied upon by learned AR are reproduced as under:

109 TAX 85:

“From the above, it is evidently clear that assertion of the Additional Commissioner that while allowing provisions as per Rule l(c), only balance sheet items are to be taken into account is misconceived and against the expressed provisions of Rule l(c). Due weightage has to be given to the off-balance sheet items as well. The learned CIR (A) has confirmed the treatment meted out by the Additional Commissioner on the basis of certain earlier orders of his predecessor. The learned AR has also produced a copy of this Tribunal decision reported as 2012 PTR l24(Trib) wherein in similar circumstances finding of the learned CIR(A) has been confirmed by the Tribunal.

“As per Rule 1(c) provision for advances and off-balance sheet items is available up to a maximum of 1 percent of “total advances”. It is directed that provision be computed accordingly on the value of total advances of Rs. 249,886,703,000/- as per accounts”.

We are therefore keeping in view the above decision finds no justification for disallowance of the claim.”

107 TAX 248:

“The bank worked out addition under rule l(c) of Seventh Schedule taking gross advances whereas department enhanced the addition by taking net advances. Learned Commissioner (Appeals) deleted the addition made by the department by directing to take the figure of gross advances. The learned AR argued that this issue has already been adjudicated by this Tribunal in favour of banks in (2012) 106 Tax 317 (Trib.) = 2012 PTR 12 (Trib.). Learned DR could not 'produce any contrary judgment on this issue. We, therefore by following our earlier judgment confirm the order of Commissioner (Appeals)”

ITA No. 61/KB 2012 to 65/KB/2012 in case of KASB Bank Limited:

We are of the view that gross advances will be taken into account as the word used in Rule 1(d) is “total advances” as also held in paragraph 116 of the judgment referred above as under:

As per rule 1(c) provisions for advances and off-balance sheet, items are allowable up to a maximum of 1% of total advances. It is directed that provision be computed accordingly on the value of total advances of Rs. 249,886,703,000 as per accounts at the time of appeal effect.

…………………………………………………………………………………………

116. We have examined the order of CIR(Appeals) and relevant provisions of law. We find that observation of leaned CIR(Appeals) is in accordance with Rule 1(c) of Seventh Schedule that mentions “total advances”. We confirm the order of CIR(Appeals)”.

ITA 1040/KB/2011 & 60/KB/2012 in case of National Bank of Pakistan:

“After hearing the arguments of both sides and perusal of the case laws relied upon, we are of the considered view that the other Divisional benches of this Tribunal have already settled this issue. We respectfully follow the earlier orders of different Divisional benches of this Tribunal. Therefore, the appeals of the taxpayer bank are allowed in each of the above tax years”.

ITA 823/KB/2012 in case of FBL

21. In view of the above binding judgments of other Divisional Benches of this Tribunal and bare perusal of law we find no hesitation to hold that capping of 1 percent and 5 percent on net advance is not in accordance with the rules prescribed. Accordingly, the taxpayer’s appeal on the ground in each of the tax year is accepted and we direct to compute the claim under Rule 1(c) at 1% / 5% of the gross advance.

ITA 324/KB/2011 in case of UBL:

In view of the above binding judgments of other Divisional Benches of this Tribunal and bare perusal of law, we find no hesitation to hold that capping of 1 percent and 5 percent on net advance is not in accordance with the rules prescribed. Accordingly, taxpayer’s appeal on the ground in each of the tax year is accepted and we direct to compute the claim under Rule 1(c) at 1% and 5% of gross advance…….

The learned AR also referred to the Circular No.3 of 2009 dated July 17, 2009, wherein it has been explained that:

“This schedule has been amended. In the light of amendments in Rule (1), the banking companies would be entitled to make provisions for advances and off-balance sheet items up to a maximum of 1% of total advances. These companies would be under obligation to provide a certificate from the external auditor to the effect that such provisions are based upon and are in line with the Prudential Regulations of the State Bank of Pakistan. The banking companies would be allowed to carry forward provisions in excess of 1% to the succeeding years.

57.1 If the provisioning is less than 1% of the total advances, then the taxpayer would be entitled to the actual provisioning for the year.

57.2 The banking companies like other resident companies would be required to pay minimum tax under section 113 of the Ordinance as per provision of the aforesaid section.”

It has also been apprised by the AR that in the tax year 2017, the assessing officer whilst applying the limit of 1% and 5% on NPL has ignored the provision against SME loans and applied the threshold considering the entire provision as against corporate loan.

12. On the contrary, the learned DR however supported the findings made in the amended order by the assessing officer.

Findings:

13. The rival arguments have been heard and record pursued. By respectfully following the judgments quoted supra (which have not been overruled yet), we hold that capping of 1 percent and 5 percent on net advance is not in accordance with the rules prescribed. We, therefore, reject the treatment accorded by the assessing officer and direct him to compute the claim under rule 1(c) at 1% / 5% of gross advance as the appellant taxpayer cannot be treated discriminately. Accordingly, the departmental appeals for the tax years 2011 and 2012 are dismissed as being devoid of merit.

14. As far as the taxpayer’s appeal for the tax year 2017 on the said issue is concerned, since there is a factual controversy involved on the amount/details of advances given to the corporate and SME sector, the taxpayer is directed to provide the details of such advances to the assessing officer who is directed to allow provision at 1% or 5% of the gross amount of advances respectively, in the light of details to be provided by the taxpayer. However, this would be done after giving the proper opportunity of being heard to the taxpayer. Thus, the order passed by the learned CIR(A) to this extent is maintained with the foregoing observations.

DIVIDEND INCOME, TAXABLE AT REDUCED RATE SPECIFIED UNDER RULE 6 AND NOT UNDER SECTION 18(4) OF THE ORDINANCE

Tax Year 2011 – Ground No. 4 [ITA No. 297/KB/2015]

Tax Year 2012 – Ground No. 4 [ITA No. 298/KB/2015]

Tax Year 2014 – Ground No. 2 [ITA No. 317/KB/2018]

15. On the said issue, all the appeals have been filed by the department. It has been contended by the taxpayer bank that the taxation of distribution from mutual funds by invoking the provisions of Section 18(4) of the Ordinance read with Rule 9 @ 35% was against Rule 6 of Seventh Schedule to the Ordinance. Under rule 6, dividend income was subjected to tax at the rates specified therein. The Seventh Schedule is all-encompassing to compute income of the banking company including dividend income and tax payable thereon. The Department's reliance on referring to general provisions of section 18 of the Ordinance is not as per law. Subsequent amendments in rule 6 through Finance Acts, 2011 and 2012, providing for taxation of dividend received from asset management company (at 20%) and from money market and income funds (at 25%) further confirms the Bank’s position/interpretation that section 18(4) of the Ordinance was not applicable on banks after the introduction of Seventh Schedule; therefore, the addition was rightly annulled by the learned CIR(A). In support, the AR for the taxpayer has placed reliance on the following unreported decisions of this Tribunal:-

UBL in ITA No. 324/KB/2011 dated 15-04-2017

“79. The rival arguments have been heard and record pursued including reported judgments cited by the learned AR of the appellant bank. As the circumstances of the appellant bank are similar to the facts and circumstances of the said case, therefore, respectfully. following the aforementioned judgments, we allow the appeal filed by the appellant bank, and the Assessing Officer is directed to re-calculate the dividend from mutual fund @ 10%. We have further noted that post-Seventh Schedule, there were specific amendments made in the law to tax income from the mutual fund at a corporate rate which means position prior to such amendment was in favor of taxpayer bank.”

MY Bank in ITA No. 389/KB/2015 dated 08-04-2019

“20. The issue also decided by the bench in ITA No. 324/KB/2011 therefore we are following the same and decide the issue in favor of the taxpayer.”

16. On the contrary, the Learned DR on the other hand supported the decision of the assessing officer and stated that the income of the banking company (which includes dividend) was taxable under Rule 6 at the rate of 35%.

Findings:

17. We have heard the arguments advanced by rival parties and also perused the relevant provisions of law along with reported judgments cited by the learned AR for the taxpayer. We agree with the submissions of learned AR that through Finance Act 2015, specific amendments were made in the Seventh Schedule to tax income from the mutual fund at a corporate rate which means the position prior to such amendments was in favor of the taxpayer bank. Since the circumstances of the taxpayer bank are similar to facts and circumstances of the cases quoted above, therefore, by respectfully following the aforementioned judgments, we reject the Department’s appeals and the Assessing Officer is directed to re-calculate the dividend from mutual fund @ 10% in the tax years under consideration.

INTEREST ON CONCESSIONAL LOANS – DISALLOWED

Tax Year 2011 – Ground No. 5 [ITA No. 297/KB/2015] [Dept Appeal]

Tax Year 2012 – Ground No. 5 [ITA No. 298/KB/2015] [Dept Appeal]

Tax Year 2013 – Ground No. 3 [ITA No. 620/KB/2018] [Dept Appeal]

Tax Year 2014 – Ground No. 7 [ITA No. 317/KB/2018] [Dept Appeal]

Tax Year 2015 – Ground No. 8 [ITA No. 742/KB/2018] [Taxpayer Appeal]

18. The learned AR for the taxpayer stated that the provision of a loan to employees is a regular and normal feature of the employment contract between employer and employee. The cost if any incurred by the employer for providing such loans cannot be disallowed as it is not different from the regular salary expense. The law itself envisages the concept of concessional loans by providing its taxability in the hands of employees; hence, providing concessional loans cannot be part of any Tax Advance Scheme. The AR in this respect relied on the following case laws wherein the issue has been decided in favor of the taxpayers.

107 TAX 248 = 2013 PTD 1429

We have considered the arguments of both sides and the above case law. The argument of DR is not valid as section 13 (7) deals with income in the hands of employees whereas here the issue is the treatment of concessional loans in the hands of the employers.

The Bank did not claim any expenses hence issue of disallowance could not arise and this aspect was comprehensively decided by this Tribunal in (2005) 91 Tax 484 (Trib.) and by the honourable Sind High Court in ITR NO.90 of 1983. By following these judgments, we decide the issue in favour of the taxpayer and dismiss the departmental appeal.

UBL in ITA No. 324/KB/2011 dated 15-04-2017

67. We have examined the arguments of both sides and case laws cited above. The arguments of learned DR are not valid as Section 13(7) of the Ordinance deals with income in the hands of employees whereas here the issue is the treatment of concessional loans in the hands of the employer. Further, the assessing officer could not establish exact relation between the loaner and the appellant bank as an associate in order to invoke the provisions of Section 108/109 of the Income Tax Ordinance, 2001. As the Bank did not claim any expense hence issue of disallowance could not arise and this aspect was comprehensively decided by the Honorable High Court of Sindh and this Appellate Tribunal in the judgments mentioned supra. Thus, by following these judgments; we direct that additions made on account of Concessional Loans should be deleted. Consequently, the appeal filed by the appellant bank succeed, and the appeal filed by the tax department rejected.

My Bank in ITA No. 389/KB/2015 dated 8-04-2019

33. Since the Bench of the Tribunal dealt with the above issue in judgment (2013) 107 TAX 248 and hold that interest on concessionary loans to employees are to be taxed in the hands of employees and not in the hands of the employer from the above-quoted line extracted from the record it is evident that the Bench of this Tribunal already decided the issue in length so we being coordinate following the same and at this score appeal of the department fails on this issue.

19. The learned DR on the other hand, supported the order passed by the assessing officer and stated that the officer has rightly made an addition to the taxable income of the Bank by strictly applying relevant provisions of the law.

Findings:

20. We have heard the arguments of both sides and also perused the judgments cited at the bar. The learned CIR(A) has remanded the matter to the assessing officer in respect of tax years 2011, 2012, and 2014 with the direction to verify the facts that if the employees are already taxed on account of benefit arising of concessional loans and that they are also charged with mark-up rate albeit at some concessional rate then no disallowance is warranted because in the light of given facts such action would be considered as double taxation. We tend to agree with the findings of the CIR(A). The order of the learned Commissioner Inland Revenue (Appeals) is within four corners of law and substantiated by cogent reasons therefore, no infirmity/illegality or irregularity is found. Accordingly, we do not find any justification to interfere with the findings of the learned Commissioner Inland Revenue (Appeals) on this score in respect of tax years 2011, 2012, and 2014. As far as the tax year 2013 is concerned, we have keenly gone through the impugned order passed by the learned CIR(A). We find that the order passed by the CIR(A) is a speaking order and there is no infirmity in the impugned order, therefore, the same is maintained. As a result, the appeals filed by the Appellant/Department are hereby dismissed and disposed of in the manner as stated above.

21. As far as the taxpayer’s appeal for the tax year 2015 is concerned on the said issue, the matter is remanded to the assessing officer with the direction to verify the facts that if the employees are already taxed on account of benefit arising of concessional loans and that they are also charged with mark-up rate albeit at some concessional rate then no disallowance is warranted because in the light of given facts such action would be considered as double taxation. This exercise would be done after giving the proper opportunity of being heard to the taxpayer and considering the case-law cited above. Accordingly, the appeal of the taxpayer for the tax year 2015 is accepted and the impugned orders passed by the authorities below are annulled with the foregoing observations.

DISALLOWANCE UNDER SECTION 21(C) ON ACCOUNT OF ACCRUED MARKUP AND WAGES EXPENSE

Tax Year 2011 – Ground No. 6 & 9 [ITA No. 297/KB/2015] [Dept Appeal]

Tax Year 2012 – Ground No. 6 & 9 [ITA No. 298/KB/2015] [Dept Appeal]

Tax Year 2013 – Ground No. 4 [ITA No. 620/KB/2018] [Dept Appeal]

22. All these appeals have been filed by the department on the subject issue. The learned AR for the taxpayer bank submitted that the assessing officer while amending the assessment of taxpayer for the tax year 2011 disallowed profit on debt and wages expense, under section 21(c) on account of non-withholding of tax. The learned AR at the outset argued that the matter does not come under the ambit of section 122(5A) in light of the larger bench judgment of this tribunal in the case of Meezan Bank Ltd reported as 113 TAX 53 and subsequently also followed in the case of MCB and many other judgments, wherein the Department itself admitted that verification of expense to take action under section 21(c) does not fall under the purview of section 122(5A) of the Ordinance. Relevant extracts of the said judgment are reproduced below for ease of reference:

i. 113 Tax 53

26. Similar situation exists in a portion of notice for the tax year 2010 appearing on page 21 para 6.1 in the amended assessment order of the officer. The proceedings were dropped under section 122(5A) by holding that these cannot be taken up under this provision. We have observed that portion of notice for the tax year 2013 appearing on page 33 para 9 of the amended assessment order also does not meet the required criteria of twin mandatory conditions and we hold that section 21(c) of the Income Tax Ordinance, 2001 is not applicable in the situation where there is no proper evidence of tax deduction available before the officer. In fact, the officer has himself stated in the findings/inference that action under section 122(5A) cannot be taken in such a situation and can only be taken under section 177.

27. We are of the firm view that the officer has formed the correct opinion in the above situations and this should be followed in all similar situations where twin mandatory conditions to invoke section 122(5A) of the Income Tax Ordinance, 2001 do not exist. We direct the respondent/department not to proceed under section 122(5A) in all such similar situations.

ii. MCB in MA (AG) No. 09/LB/18 in ITA No. 2162/LB/2017 dated 12-03-2018

16. Respectfully following the above binding precedent, we hold that the action of the Additional Commissioner of proceeding with addition under section 21(c) of the Ordinance through recourse under section 122(5A) of the Ordinance is grossly unlawful and unjustified.

iii. My Bank in ITA No. 389/KB/2015 dated 8-4-2019

29. Learned AR further stated that the instant issue has already been decided by the Hon’ble Sindh High Court in favor of taxpayers/banks reported as 2010 PTD 1772. Therefore, the decision of CIR(A) deleting the disallowance may please be upheld and dismiss the departmental appeal.

23. Notwithstanding the aforesaid, the learned AR argued that the Assessing Officer has made ad-hoc disallowance under section 21(c) on alleged non-withholding of tax on accrued profit on debt and wages expense without providing any breakup of amount disallowed, whatsoever. The AR further submitted that the banks as a usual practice under the accrual principles of accounting, charge mark-up/interest expense, in respect of the customer's deposits to the Profit and Loss Account at cut-off dates with a corresponding effect shown on ‘other liabilities’ being mark-up payable on maturity of such deposits. The mark-up/expense is never actually credited into the individual accounts of the bank’s customers or paid to account holders as at the balance sheet date. It was therefore shown in ‘other liabilities’ to the Financial Statements.

The AR further agitated that the matter in hand has also been decided by the Hon’ble Sindh High Court through a judgment titled M/s United Bank limited Vs Deputy Commissioner Inland Revenue and three others, (2010 PTD 1772), and the said judgment was also followed by this tribunal in the case of M/s Faisal Bank Ltd. The relevant extracts of the said judgments are reproduced hereunder:-

2010 PTD 1772 (SHC)

However, in our opinion, the analogy between the provisions of the above section and section 158 of the present Ordinance can be drawn from the word “receivable'' used in section 17(1)(a) of the Ordinance, 1979 and the phrase “to the account of recipient'', employed in section 158 of the present Ordinance and thus the principle as laid down in the above-cited judgment that in view of the word “receivable'' used under section 17(1)(a) of the Ordinance, 1979 income can only be charged under the head interest on securities in the income year in which it is receivable by an assessee is equally applicable to a case under section 158 of the present Ordinance, as in terms thereof and in view of the above phrase used therein the petitioners become liable to withhold deduct the tax in question and to deposit the same with the State treasury only at the time of maturity of the deposit and when the same is accordingly credited to the respective account of the customer/depositor. We would, therefore, hold that the impugned demand, from the Income Tax Authorities, is illegal, without any justification, and quash the impugned notices and set aside the orders passed in pursuance thereof.

FBL in ITA No. 2162/LB/2017 dated 12-03-2018

We have heard both the parties and pursued the records. In view of the above binding decision of SHC, the addition made on account of non-withholding of tax are deleted. Further, the DR's argument that interest expense is allowable on a payment basis is also dismissed as the same is neither substantiated in the light of accrual basis of accounting, nor in accordance with the provisions of the Seventh Schedule.

24. In respect of disallowance of contractual wages expense, the AR on facts, apprised that the appellant has executed a contract with M/s. Mustang HRMS (Pvt) Limited (a human resource service provider) provides the labour to Bank on a contract basis. Under the agreement, the bank reimburses the cost of wages/salary and pays the commission for services rendered. The AR informed that it is a settled principle that the taxpayer Company is only liable to withheld tax on service element (on which the Bank has duly withheld and deposited) whereas withholding tax is not applicable on the element of salary of contractual labour which the Bank reimbursed to the service provider as related withholding tax liability on salary expense is paid by the service provider. In support of the arguments, the learned AR referred to various decisions of higher appellate authorities wherein it is held that the Withholding is not applicable on the amount of reimbursement. The said interpretation has now been reiterated in the recent judgment of Hon’ble SHC in C.P. No. D-2694/2019 dated 27-04-2021 wherein the Hon’ble High Court held that in the case of Human Resource service providers, withholding tax is applicable on the gross amount of fee charged for providing manpower services.

25. On the other hand, the learned DR argued that since the markup has been accrued it is deemed as credited to the accounts of the customer. The learned DR frankly conceded that the matter has already been decided in favor of the taxpayer by SHC, however, the matter is now sub-judice before the Hon’ble Supreme Court.

Findings:

26. We have heard the arguments of both sides and perused the relevant record. The submissions made on behalf of the taxpayer have substance. The larger Bench of this tribunal in the case of Meezan Bank Ltd cited supra inter alia observed that the issue of examining details does not fall within the limited scope contemplated in section 122(5A) of the Ordinance. Further, it is a settled principle that withholding tax is applicable at the time of payment rather than when accrued which has also been validated by the Hon’ble High Court. Hence, Department’s contention that if the expense is allowable on accrued markup expense, withholding tax would also be applicable on accrued balance is very illogical and rejected in various judgments.

27. We also agree with the AR’s submissions regarding contested disallowance of contractual wages in light of the above-mentioned judgment of Hon’ble Sindh High Court that withholding tax is applicable on gross payments less reimbursable expenses. Therefore, Department’s appeals failed on both scores. As a result, the impugned order passed by the learned CIR(A) is maintained.

REVERSAL OF PROVISIONS AGAINST NPL

Tax Year 2009 – Ground No. 2 [ITA No. 1262/KB/2015] [Dept appeal]

Tax Year 2010 – Ground No. 2 [ITA No. 1263/KB/2015] [Dept appeal]

Tax Year 2011 – Ground No. 2 [ITA No. 297/KB/2015] [Dept appeal]

Tax Year 2012 – Ground No. 2 [ITA No. 298/KB/2015] [Dept appeal]

Tax Year 2014 – Ground No. 5 & 6 [ITA No. 317/KB/2018] [Dept appeal]

Tax Year 2015 – Ground No. 7 [ITA No. 742/KB/2018] [Taxpayer appeal]

Tax Year 2016–Ground No. 6 [ITA No. 1031/KB/2019] [Taxpayer appeal]

Tax Year 2017–Ground No. 6 [ITA No. 1032/KB/2019] [Taxpayer appeal]

28. The above grounds relate to reversal out of the provision for bad debts (other than sub-standard provision), the claim of which was restricted to 1 or 5 percent of advances and resulted in double taxation.

29. The learned AR submitted that if these reversals in the profit and loss account were not claimed, it would be doubly taxed firstly on account of limiting the allowability of provisions at 1% or 5% of advances at one end and taxing the reversal thereof. This would be against the established principles of taxation and rules of prevention of double taxation specified in section 73 of the Ordinance; sub-section (1) of which is particularly applicable in this case. The AR through the following chart explained that by claiming post-seventh schedule reversals, the amount of provision carried forward has accordingly been reduced; hence there is no loss of revenue, as it is just a matter of timing difference, which if not allowed would result in double taxation.

*REVERSAL OF POST SEVENTH SCHEDULE PROVISIONS – EXAMPLE*

			Year	Year
			1	2
Provisions		A	100	130	25	(pre 7th Sch)
Reversal			(20)	(30)	5	(post 7th Sch)
			80	100

Brought forward		B	-	30

Advances			70,000	90,000
1% of Advance		C	70	90
Carried forward		A + B - C	30	70

			Year 2

			Department	Bank

	Add back		130	130
	Allow		90	90+5 (reversal)
	Carried forward		70	65 (70 - 5)

While explaining the above example, the AR elaborated that Bank's view is that if reversal of Rs. 5 is not allowed then Rs. 5 will be doubly taxed, firstly as provision for Year 1 (to the extent of Rs. 30) and secondly as a reversal. As per Bank, if reversal of Rs. 5 is allowed then carried forward will be Rs.65. As per Department, if reversal is not allowed, then carried forward will be Rs.70. Therefore, the difference between Bank and Department positions is of the timing difference.

30. The AR apprised that the issue has already been decided in favor of banks through various decisions of this Tribunal. In support of his arguments, the AR placed reliance on the decisions of ATIR reported as 2012 PTD 1055 and 109 Tax 85. The AR also referred to the unreported decision of Faysal Bank in ITA No. 823/KB/2012 dated April 5, 2017, and the judgment of Askari Bank in ITA No. 451/IB/2018. For ready reference relevant extracts of the judgments are reproduced as under:

Askari Bank Limited in ITA No. 451/LB/2018 dated 24-07-2019

The above principle was also followed later on in the judgment reported as 109 TAX 85. It is also pertinent to mention here that the same position was also accepted by the Department in the appellant's own case for the tax year 2011 vide order dated 29.05.2013. Therefore, keeping in view the forgoing reasons, the addition on account of reversal of provision against non-performing loans amounting to Rs. 1,962.1 million for the tax year under consideration is deleted.

Faysal Bank in ITA No. 823/KB/2012

43. We have considered the argument of both parties and the decision of commissioner appeals. We are of the opinion that if the claim of bad debts is restricted to 1% or 5% of the advance, the amount over and above these limits, being disallowed, be doubly taxed if reversal is not allowed in the tax year 2011. Hence, following the principles of taxation, we agree that the claim of reversals out of such provisions should be reduced from the carry-over amounts, which has been rightly done by the Bank.

2012 PTD 1055

We have examined the facts and case-law cited. In this ease, the reversal has been taxed without any justification. The appellant-Bank undisputedly claimed a total provision of Rs. 23,301,591,000 but reduced it to Rs. 18,893,580,000 meaning by difference representing reversals and recoveries was offered for tax. The Department by disallowing amount of Rs. 23,301,591,000 (which included the reversal of Rs. 4,438,011,000) taxed it not only twice but thrice as it added back an amount of Rs. 4,438,01,000 in total income. Following our judgment in I.T.A. No.306/LB/2009 dated 8-8-2009, we delete this addition.

31. On the contrary, the learned DR opposed the argument of AR and supported the decision of the assessing officer.

Findings:

32. Arguments of both rival parties have been heard at length. After examination of facts and case laws relied upon by the learned AR, we are persuaded with AR’s submission that the issue beforehand has already been decided in favor of banking companies and recently in the case of M/s. Askari Bank Ltd through the unreported judgment of this Tribunal in ITA No. 451/LB/2018 for the tax year 2015. We, therefore, following the judgment of the Tribunal on the issue direct the assessing officer to delete the tax demand on account of reversal of provisions for bad debts earlier disallowed under the Seventh Schedule. As a result, the appeals filed by the department in respect of tax years 2009, 2010, 2011, 2012, and 2014 are dismissed being devoid of merit, and the orders passed by the CIR(A) are maintained. The appeals filed by the taxpayer on this account in respect of tax years 2015 to 2017 are accepted and the orders passed by the lower authorities are annulled.

REVERSAL OF PROVISIONS AGAINST DIMINUTION IN VALUE OF INVESTMENT

Tax Year 2011 – Ground No. 7 [ITA No. 297/KB/2015] [Dept appeal]

Tax Year 2012 – Ground No. 7 [ITA No. 298/KB/2015] [Dept appeal]

33. The AR stated that the officer through the amended assessment order disallowed reversal of diminution in value of investment without appreciating the treatment carried out in the returns and books of accounts.

34. The AR submitted that the Bank has not claimed the reversal for diminution in value of an investment which is evident from a bare perusal of tax computation for the tax year 2011. The CIR(A) after reviewing the treatment carried out in return and accounts has rightly deleted the tax demand with the following remarks on pages no. 27 and 28 of the appellate order dated 16-12-2014:

“I have considered the submissions of the appellant and perused the impugned order. The arguments of the AR have force because Seventh Schedule does not specifically require offering yearly provisions made for diminution in the value of an investment and this is but the voluntary act of the appellant to offer the same considering the accounting entries are of provisional nature. Based on the treatment offered for the tax year 2011 when no accounting reversal of provision has been made the sum added in the computation of taxable income is prime-facie erroneous because the same is done without understanding the accounting treatment and therefore the same is ordered to be deleted.”

35. The DR on the other hand supported the act of taxation officer by stating that since provision is allowed reversal of provision is not allowable.

Findings:

36. Submissions of both rival parties have been considered. Without dilating into the admissibility of the provision under Rule 1(g) at this stage, it is worth noticing that where any provision is allowed, corresponding reversal is not allowable and vice versa. In the Bank’s case, the Commissioner IR Appeals after examination of accounting treatment and corresponding returns held to delete the tax demand raised by the assessing officer on account of reversal of provision for diminution in the value of the investment. The DR on the other hand without rebutting to the accounting treatment carried out in the accounts and CIR(A)’s findings merely contested the allowability of provision/reversal on the touchstone of the notional claim. We, therefore, do not find any reason to deviate from the decision of Commissioner Appeal in the appellate order. Department’s appeals stand dismissed accordingly.

REPAIR & MAINTAINCENCE EXPENSE

Tax Year 2011 – Ground No. 8 [ITA No. 297/KB/2015] [Dept appeal]

Tax Year 2012 – Ground No. 8 [ITA No. 298/KB/2015] [Dept appeal]

Tax Year 2014 – Ground No. 8 [ITA No. 317/KB/2018] [Dept appeal]

37. The AR stated that through the order, the Assessing Officer disallowed the Bank’s claim of repair and maintenance expense under section 21(n) of the Ordinance by contending the same as capital in nature on the premise that these items have a useful life of more than one year. The AR argued that even otherwise Books of Accounts prepared as per the regulations of State Bank have sanctity under Seventh Schedule and the officer is bound to accept the same. The AR further argued that repair and maintenance is a regular revenue expense and no adverse inference is drawn by the department in subsequent years.

38. The DR on the other hand argued that the taxation officer has rightly disallowed the repair and maintenance expense by invoking the provisions of Section 21(n) of the Ordinance.

Findings:

39. We have carefully perused the submissions of both parties. No business can operate/run without the maintenance of its premises and plant. The vital point is to distinguish the cost as revenue or capital in nature. In the former case the cost is expensed out in books whereas in the latter case, the cost becomes part of a tangible asset. If the expense is of revenue in nature, the entire cost is allowed in one go against taxable income whereas in another case where it becomes part of the cost of tangible, it is allowed by way of depreciation over the useful life. The AR explained that the bank has incurred such costs for the repair and maintenance of its different branches, ATMs installed at different locations, computers, and generators. Such cost was necessary to keep the assets operational for business use and recognized as an expense in the Books. The Commissioner IR Appeals after minutely considering the facts annulled the department’s action of disallowing the expense under section 21(n). We, therefore, do not find any reason to deviate from the findings given in the appellate order by the learned CIR(A), even otherwise the matter is of timing difference and would not cause any loss of revenue. Therefore, the department’s appeals are rejected.

LEVY OF MINIMUM TAX UNDER SECTION 113

Tax Year 2010 – Ground No. 2 [ITA No. 1083/KB/2015] [Taxpayer appeal]

Tax Year 2011 – Ground No. 10 [ITA No. 297/KB/2015] [Dept appeal]

Tax Year 2012 – Ground No. 10 [ITA No. 298/KB/2015] [Dept appeal]

40. Briefly, the Bank in the return of income filed for the tax year 2011 has not accepted the liability of minimum tax under section 113 of the Ordinance due to gross loss. The assessing officer disagreed with the treatment carried out in the return and levied minimum tax under section 113 by stating that the Bank has declared gross profit. The AR argued that minimum tax is not applicable due to the gross loss situation. The AR also referred to the judgment of the Tribunal in the case of KASB bearing ITA No. 786/KB/2015 dated August 19, 2019. In the said judgment the Divisional Bench of this tribunal, after detailed discussion on direct and indirect expenses, has laid down the principle of Computation of Gross loss for the purpose of levy of minimum tax under section 113 of the Ordinance. A relevant extract of the operative part of the judgment is reproduced below for ready reference:

“29. In the case of any business setting, direct expenses are traceable to the production of a specific good or provision of a service. these expenses can easily be connected to a specific "cost object", which items such as software, equipment, and raw materials. It can also include labor, assuming the labor is specific to the product, department, or project. The majority of direct costs are variable and when direct costs vary, it is because they increase as additional units of a product or service are created. Indirect expenses are also necessary to the production of a specified good or provision of service, but they are not traceable to such acts and are necessary to keep the business in operation. Indirect costs go beyond the expenses associated with creating a particular product to include the price of maintaining the entire company. These overhead costs are the ones left over after direct costs have been computed, and are sometimes referred to as the "real" costs of doing business. For instance, material and supplies including cleaning supplies, utilities, office equipment rental, etc, needed for the day-to-day operations are examples of indirect costs and while these contribute to the company as a whole, they are not associated with the creation of anyone service. Other common indirect costs include advertising and marketing, communication, etc. Like the direct cost, indirect costs can be both fixed e.g., rent, and variable e.g., costs of electricity and gas. the upshot of this discussion is summarized hereunder:

	*Direct Expense*		*Indirect Expense*
(i)	Expense or direct costs incurred while manufacturing the main "product" or "service" of the company are termed as direct expenses.	(i)	Expenses or indirect costs which are not directly related to the core “product” or “Service” of the Company are termed as indirect expenses.
(ii)	They become part of the total cost of goods/ services sold	(ii)	Indirect expenses are not included in the total cost of goods/ services sold.
(iii)	Shown on the debit side of a trading account.	(iii)	Shown on the debit side of an Income Statement.
(iv)	Direct expense can be allocated to a specific product, department, or project.	(iv)	Indirect expenses are usually shared amongst different products, departments, or projects.
(v)	Examples – Direct labor (wages), cost of raw material, power, rent of factory, etc.	(v)	Examples – Printing cost, utility bills, legal and consultancy, etc.

41. In the aforesaid judgment, the Divisional Bench also distinguished the judgment of ATIR reported as 2014 PTD 1064 (wherein this Tribunal discussed the computation of gross loss in case of manufacturing concern) by stating that accounts of Banking Company (i.e. service sector) are prepared differently as compare to manufacturing concern as in the former case there is no term such as “cost of goods sold” or “gross profit” used in the income statement.

42. On the other hand, the learned DR supported the action of the assessing officer by arguing that the law is very clear about the computation of gross loss and only markup expense should be deducted from gross markup income.

Findings:

43. After considering the submissions of rival parties, we are inclined to agree with the arguments of AR that in the case of the service sector computation of gross profit is different from the manufacturing concern wherein the direct cost is recognized as cost of goods sold. Hence, the decision of the Tribunal reported as 2014 PTD 1064 is not applicable in entirety as rightly held by this tribunal in the above-quoted judgment of KASB Bank. We, therefore, for the sake of justice and fair play consider it appropriate to give the direction of re-examination of the issue in light of principles laid down by the Tribunal in the judgment of KASB. As a result, all the appeals are disposed of in the aforesaid terms.

CREDIT OF ADJUSTABLE WITHHOLDING TAXES AND REFUND ADJUSTMENT

Tax Year 2011 – Ground No. 11 [ITA No. 297/KB/2015] [Dept appeal]

Tax Year 2014 – Ground No. 10, 11 & 12 [ITA No. 317/KB/2018] [Dept appeal]

Tax Year 2015 – Ground No. 2, 3 & 4 [ITA No. 795/KB/2018] [Dept appeal]

Tax Year 2017 – Ground No. 10 [ITA No. 1032/KB/2019] [Taxpayer appeal]

44. In the return of income, the Bank has claimed adjustment of withholding taxes and refund against the tax liability for the year, which was disallowed / short allowed by the assessing officer through the amended assessment orders passed for these years. In appeal, the CIR(A) has set aside the issue for re-examination. The AR stated that Bank has already provided the supporting details during the earlier proceedings, however, the appeal effect to the directions of CIR(A) has not been given by the Department as per the spirit of the law.

45. The DR on the other hand supported the action of the assessing officer by stating that the Bank’s claim of refund has been allowed/disallowed after examination of facts and available details.

Findings:

46. We have heard the arguments of both parties and perused the record. The CIR(A) has set aside the issue for re-examination. We tend to agree with the findings of the learned CIR(A). The CIR(A) has rightly directed the assessing officer to re-examine the facts. The appeals are accordingly disposed of.

AMORTIZATION OF GOODWILL

Tax Year 2009 – Ground No. 2 & 3 [ITA No. 1082/KB/2015]

Tax Year 2010 – Ground No. 3 & 4 [ITA No. 1083/KB/2015]

Tax Year 2011 – Ground No. 2 & 3 [ITA No. 132/KB/2015]

Tax Year 2012 – Ground No. 2 & 3 [ITA No. 133/KB/2015]

Tax Year 2013 – Ground No. 2 & 3 [ITA No. 899/KB/2014]

Tax Year 2014 – Ground No. 2 & 3 [ITA No. 112/KB/2018]

Tax Year 2015 – Ground No. 3 & 4 [ITA No. 742/KB/2018]

Tax Year 2016 – Ground No. 5 [ITA No. 1031/KB/2019]

Tax Year 2017 – Ground No. 5 & 11 [ITA No. 1032/KB/2019]

47. On this issue, all the appeals have been filed by the taxpayer bank. At the outset, the learned AR explained that the taxpayer bank was formed as a result of the merger of Branches of American Express Bank Limited (AEBL) with Jahangir Siddiqui Investment Bank Limited (JSIBL) to form a new banking company namely JS Bank Limited (JSBL). As a result of the merger, positive goodwill arose in the books of JSBL as the amount paid / shares issued were higher than the net value of the business acquired/merged. The AR further explained that goodwill generally arises during business combinations when the price that one company pays to acquire another company is greater than the value of the target company's "net assets". The goodwill so arises is recognized as an “intangible” in the books of buyer/parent company as per the International Accounting Standards. Arguing further, the AR stated that goodwill was recognized in the books for the year ended December 31, 2006 (i.e. tax year 2007) as a result of a merger in that year, and tax amortization was accordingly claimed under section 24 of the Ordinance whilst offering related accounting charge of amortization. The said treatment viz. recognition of goodwill in the tax year 2007 and corresponding claim of amortization was not disputed by the department as the return of income filed for the tax year 2007 is considered as deemed assessment order as per section 120(1)(b) of the Ordinance. The said deemed assessment has now attained finality and as such, it is a past and closed transaction. Continuing further, the AR stated that since recognition of goodwill has not been disputed by Department, the only dispute with the Department is now over the claim of amortization thereof under section 24 of the Ordinance which was disallowed by the officer in tax years 2008 to 2017 by relying on the judgment of ATIR 102 TAX 475 in case of Standard Chartered Bank (SCB). The disallowance was later confirmed by the CIR(A). The AR explained that goodwill recognized by Appellant relates to the businesses now merged. Such business continues post-merger. Therefore, the bank derives the benefit of the goodwill of the businesses post-merger; hence amortization thereof is allowable.

48. The learned AR further submitted that in a reference filed against the aforementioned decision of ATIR in the case of Standard Chartered Bank (SCB), the Hon’ble Sindh High Court through judgment reported as 2017 PTD 1585 has decided the issue in favor of SCB. The Hon’ble Sindh High Court (SHC) has answered the question of whether goodwill is an intangible asset within the meaning of the definition given in section 24(11) of the Ordinance in the affirmative. The Hon’able SHC has also discussed the allowability of goodwill post-merger of businesses. Consequently, the amortization of the goodwill is allowable under section 24 of the Ordinance.

Further explained that in the above-mentioned judgment, the Hon’ble SHC has also held that capital gains, if any, were made by the non-resident sellers of the shares and not the buyer. The seller was entitled to the benefit of the exemption certificate applied, and since on account thereof there was no obligation to withhold tax, the Petitioner (being a withholding agent) applied for exemption accordingly. Accordingly, SHC has held that payment within a single transaction may take a different form and substance (revenue payment) when viewed from the perspective of the seller, and a different form and substance (capital payment) when viewed from the perspective of the buyer.

It has been stated that the Hon’ble SHC has also held that section 97A of the Ordinance applies in respect of schemes of amalgamation as are, inter alia, sanctioned by the State Bank under section 48 of the 1962 Ordinance. However, this section has no application in the facts and circumstances of the present case. This is so because clause (d) of subsection (1) of section 97A expressly provides that the section applies to amalgamations sanctioned on or after 01.07.2007 and in the present case the transaction of amalgamation took place in 2006 and the amalgamation was affected on December 30, 2016.

49. In the context of above, the AR compared the facts of Appellant with the facts considered in the case of SCB as under:

Standard Chartered Bank (SCB)	JS Bank (JSBL)
FACTS OF THE CASE:
(i) Branches of SCB and Union Bank merged. (ii) Positive goodwill arose as the amount paid / shares issued were higher than the net value of business acquired/merged	(i) The branch of American Express Bank Limited and JSIBL merged. (ii) Positive goodwill arisen of as the amount paid / shares issued were higher than the net value of business acquired/merged
(iii) Date of amalgamation: December 30, 2006.	(iii) Date of amalgamation: December 30, 2006.
REASONS FOR DISALLOWANCE BY THE TAX OFFICER:
(i) Goodwill is not expressly included in the definition of “Intangible” under section 24 of the 2001 Ordinance, and Goodwill cannot be deemed to be included under the category of ‘expenditure which provides an advantage or benefit for a period of more than one year’. Consequently, goodwill cannot be treated as an intangible asset; (ii) Goodwill is computed only for the purpose of accounting standards and assessment is being made under the Ordinance. In case of conflict between the two, tax laws would prevail. Furthermore, the amount of Goodwill would have been on the lower side, if the acquisition of net assets was made at fair value (instead of above fair value), as per provisions of the Ordinance. (iii) The substance of the transaction is in effect that consideration was paid to acquire shares of UB. Hence, the payment made by SCB pertains to the cost of assets/shares. Shares are tangible assets and the same cannot be amortized as Goodwill. The cost is already qualified and admitted as a part of the cost of shares of UB, which are capital assets in terms of section 76 of the Ordinance. (iv) If amortization of Goodwill is allowed then it would be tantamount to amortizing the cost of shares, which is not permissible under the law. (v) Seller Bank had applied for an exemption certificate treating this transaction as “exempt/capital gain”. This certificate was issued to the Bank and holds its validity to date. The taxpayer has never surrendered its claim. It was construed by the Department as an afterthought that the taxpayer has resorted to the colouring of the transaction in a manner that suits its objective of avoiding the tax. (vi) The Bank has not produced any satisfactory reason or documentary evidence either before or during the proceedings, that amount has been paid as goodwill. It is also observed that the right to use the name of the acquired bank (UB) has not been acquired and that whatever goodwill was associated with the acquired bank has become nonexistent once the bank was acquired by the SCB through a merger.	(i) Goodwill does not fall in the definition of an intangible asset as provided in section 24(11) of the Ordinance, being not an expenditure providing any advantage on benefit. (ii) The amalgamation process reveals the acquisition of shares of JSIBL against the shares of JSBL; hence, it is the acquisition of shares (capital assets) and does not involve the acquisition of goodwill; (iii) The amalgamation process does not reflect goodwill or any payment on that account, as no goodwill appears in the books of account of JSIBL; (iv) The substance of the transaction is in effect that consideration was paid to acquire shares of the target Bank. Hence, the payment made by JSBL pertains to the cost of assets/shares. Shares are tangible assets and the same cannot be amortized as Goodwill. The cost is already qualified and admitted as a part of the cost of shares. (v) If amortization of Goodwill is allowed then it would be tantamount to amortizing the cost of shares, which is not permissible under the law.

50. The AR also relied upon the judgment of Lahore High Court bearing ITR No.17 of 2012 dated February 27, 2017, in the case of M/s. Pak Arab Fertilizers Limited wherein the Hon’ble LHC has also answered the question in affirmative in favour of the taxpayer on the facts and circumstances similar to Appellant, relevant extracts of the decision are reproduced below for ready reference:

“10. the said matter is also exhaustively dealt with in judgment rendered in ITRA No. 340 of 2010 referred to by the learned counsel for the respondent. In the said judgment, the learned, Sind High Court was dealing with the questions whether goodwill comes within the meaning of the definition of "intangible" given in section 24(1) of the Ordinance and whether the petitioner is entitled to amortize and expense any goodwill in terms of section 24. The learned Sindh High Court relied upon the judgment of the Hon'ble Supreme Court reported as Dr. M.B. Akalsaria v. Commissioner of Wealth Tax Karachi 1992 SCMR 1755 in which a similar question was in issue and in which judgment it was held that goodwill is an incorporeal property in the class of patents, copyrights and trade-marks and as such constitutes movable property. The learned Sindh High Court, therefore, held that goodwill is incorporeal property falling in the same class as patents, copyrights, and trademarks. Para 23 of the judgment of the Sindh High Court is relevant and is reproduced hereunder:

23. The nature of the intangible here relevant (goodwill) has already been considered in the above. It is inextricably linked to and based on, the business as a whole and the operation of that business. To put it differently, it is the operation of the business that “generates”, i.e., creates goodwill. Thus, the owner-operator of the business is the “creator” of the goodwill and hence entitled to amortize this intangible in terms of section 24. It may be that it is difficult (and perhaps exceedingly so) to ascertain whether and when, the goodwill was created, and the difficulty may well be compounded by the fact that it is in the nature of goodwill that it is dynamic and not static, and may increase or decrease (i.e., become “impaired”, which decline may sometimes be precipitous). But, in principle, none of that can stand in the way of the “creator” of the goodwill claiming amortization under section 24. In the situation at hand, Union Bank, the transferor, being the “generator”/ “creator” of the goodwill would have been entitled to amortize the same and entitled to the benefit of deductions allowable under section 24. Therefore, as provided in section 97(2) (c), the benefit thereof passed on to the transferee company, the Petitioner. Hence, in our view, even if the Department is correct in asserting that section 97 applies to amalgamation situations, and did apply to the facts and circumstances of the case, that would not materially alter the position and bring it in its favour. On any view of the matter, therefore, the second of the three questions posited above (see para 9) must be answered in the affirmative.

11. The above passage propounds the correct exposition of the law on the subject and is fully applicable to the facts of the present case. in our opinion, the answer No. 2 is in positive.”

51. The AR also referred to the judgment of M/s. NIB Bank Limited in ITA No. 2891/LB/2018 dated February 24, 2020, wherein the learned Divisional Bench while relying on the afore-mentioned decisions of Hon’ble Courts allowed the claim of amortization of goodwill upon the merger of banking entities.

52. Besides above, the AR also referred to the amendment made in
section 24 through Finance Act, 2019 (for excluding goodwill arising on account of the accounting treatment of mergers, etc, from the definition of intangibles) reiterates the position and ratio of decisions of higher appellate authorities before such amendment. The AR explained that the subsequent amendment in section 24 also endorse the legislature's intent of considering goodwill as an intangible asset for amortization under section 24 of the Ordinance.

53. The learned DR on the other hand, supported the action of the assessing officer and the decision of CIR(A) in this respect.

Findings:

54. We have given due consideration to the rival submissions, perused the detailed record of the case, and keenly gone through the decisions relied upon and referred to by both the learned representatives. There is no dispute or disagreement between the parties that the claim of goodwill and amortization was first time taken by the appellant in the tax year 2007 and the department has not taken any action at the relevant time. Thus, the claim of goodwill and amortization has attained finality, and thus, it is a past and close transaction. In these admitted and undisputed facts, the basic question for determination is whether any different position on this specific issue and matter could be independently taken in any year after the tax year 2007 without first modifying or altering the position in the tax year 2007 itself. And, in this regard whether the settled principles relating to the doctrine of estoppel, res judicata, or change of opinion, etc. could be resorted to. In our considered opinion, the answer to the proposition is obviously in the negative. In terms of an unambiguous scheme envisaged in the statute, the deductions relating to amortization move in a particular direction on a year-on-year basis. The amount admissible under the head amortization for the tax year 2007 originate from the deemed order for the tax year 2007. Consequently, there is no legal or practical mechanism to take any contrary position in the tax years 2008 and onwards without first modifying the position in the tax year 2007. There is no cavil to the principles settled by the Apex Court in Waheed-Uz-Zaman case [(1965) 11 TAX 296 S.C] and Pakistan Industrial Engineering Case [1992 PTD 954], however, these are not applicable in the instant case. The principles enunciated in these landmark judgments do not permit or support re-examination or reopening of a transaction initiated and completed in an earlier year in the garb of the principle of res judicata. It is reiterated that firstly, the principle of res judicata/ estoppel is absolutely inapplicable in the present case and secondly, these principles do not apply to the same transaction concluded in a prior year. The doctrine that each year is independent does not permit reopening and re-examination of an identifiable transaction entered into and concluded in prior years in the garb of res judicata/ estoppel. If this was permissible, it would follow that no matter would ever attain finality or closure. In arriving at this conclusion, we are fortified by the decision of this Tribunal in MCB Bank Limited in ITA Nos. 2891 & 2892/LB/2018 dated 24.02.2020 wherein the following findings were recorded: -

“21. We are mindful of the legal position that the principle of res- judicata does not apply in income tax proceedings and each year is independent but this principle is ab initio inapplicable in this case. That is so because it is only one transaction that was completed on 31.12.2007 and consideration and values thereof attained finality. In all succeeding years, it is the same transaction, and no new transaction, whose effect is being given in terms of provisions of section 24 of the Ordinance. In such a situation, the value and consideration could only be questioned and challenged in the year of completion and not in any succeeding year under the garb of res judicata. If this was to be allowed it would give rise to startling results giving the mandate to tax authorities to challenge or dispute any past and closed the transaction on such grounds. This is neither permissible nor lawful. The consideration and values having not been disputed in the year of completion of the transaction, the contention of the learned LA cannot be acceded to under any circumstances and is thus rejected/repelled….”

55. Accordingly, we have no hesitation in our minds that by virtue of finality attained by the deemed assessment order for the tax year 2007, the revenue acted unlawfully, illegally, and without jurisdiction in initiating proceedings in the succeeding tax years, the position determined in the tax year 2007, that had attained finality for all purposes. It is a settled proposition of law that what cannot be done directly, is not permissible to be done obliquely, meaning thereby, whatever is prohibited by law to be done, cannot legally be affected by an indirect and circuitous contrivance on the principle of "quando aliquid prohibetur, prohibetur at omne per quod devenitur ad illud." An authority cannot be permitted to evade a law by "shift or contrivance". Reliance may be placed on Jagir Singh Vs. Ranbir Singh, (AIR 1979 SC 381), M.C. Mehta Vs. Kamal Nath & Ors., (AIR 2000 SC 1997) and Sant Lal Gupta & Ors. Vs. Modern Co-operative Group Housing Society Ltd. & Ors., (2010 (11) SC 273). It is also well settled that the issues once settled and accepted by the Department shall not be allowed to deviate, because it will create uncertainty which has always been deprecated and disapproved by the superior Courts, Legislature as well as the Board itself. Further, a vested right has been created in favour of the appellant with the deemed order passed under section 120(1)(b) of the Ordinance in respect of the tax year 2007 which admittedly has attained finality and therefore, vested right cannot be taken away by initiating fresh proceedings on the same point. Reliance is placed on the case titled M/s. Glaxo Smith Kline Pakistan Limited, Karachi Vs Collector of Customs, Sales Tax and Central Excise (Adjudication), Karachi-III, Karachi, (2004 PTD 3020) wherein it observed that: -

“12……….. It is admitted fact that the order dated 4-2-2000 (issued on 8-2-2000) competently passed by the Additional Collector-II, deciding the same issue as agitated in the second show-cause notice and after a full-fledged hearing and deliberation it was decided that the Eno Fruit Salt enjoyed exemption from the payment of sales tax. The order was open to appeal under section 45 “(as it stood before substitution by Finance Act, 2000) and was subject to suo motu revision by the Board. Neither any appeal was preferred by the Sales Tax Department assailing the findings nor any revisional proceedings were initiated. The effect was that the order passed by the Additional Collector Adjudication, attained finality having a binding effect on the Sales Tax Department. Re-agitating of the same issue by the Sales Tax Department is against all the principles of administration of justice and fair play. This course of action cannot be allowed because, firstly, it is against the principles of the administration of justice; secondly, it is discriminatory in nature, as any order passed in adjudication not assailed in appeal by an assessee, is always treated to be final and the same principle should be applicable to the Department; thirdly, it militates against the principles applicable to the tax matters, that the issues once settled and accepted by the Department shall not be allowed to be deviated, because it will create uncertainty which has always been deprecated and disapproved by the superior Courts, Legislature as well as the Board itself. Fourthly, in the present case, the issue stands decided by an adjudicating order. The Legislature has gone by enacting section 65 in the Sales Tax Act, 1990 to the extent of recognizing practice which is the result of inadvertence. The learned Tribunal is also aware of this provision, which has been referred in the concluding part' of the impugned order; fifthly, a vested right has been created in favour of appellant with the order of the Adjudicating Authority, which cannot be taken away by the executive branch of the Sales Tax Department by initiating fresh proceedings on the same point.” (Emphasis supplied)

56. Notwithstanding the aforesaid, the contention of the Department that goodwill is not an intangible asset as defined in section 24 has also been settled by SHC in the case of Standard Chartered Bank reported as 102 TAX 475 which was later on followed by the Hon’ble High Court of Lahore in case of M/s. Pak Arab Fertilizers and by the Tribunal in case of NIB Bank. Furthermore, the subsequent amendment in section 24(11), whereby the definition of intangible was modified for excluding self-generated goodwill from the ambit of intangibles, put to rest controversy if any as to whether goodwill arising in such circumstances is an intangible asset or not. It is worth noting that the said amendment was not introduced as an explanation to make such exclusion retrospectively applicable. This clearly indicates that the definition of intangible before such amendment includes self-generated goodwill. Reliance may be placed on the judgment of the Hon’ble Supreme Court of Pakistan titled Commissioner of Income Tax/Wealth Tax Companies Zone-II, Lahore Vs M/s Lahore Cantt Cooperative Housing Society, Lahore, and 7 others, (2009 PTD 799). In the said judgment it was held by the Hon’ble Supreme Court that the societies are not covered by the definition of the Company as provided in section 2(16)(b) of the repealed Income Tax Ordinance, 1979. While enacting the Income Tax Ordinance of 2001, such Cooperative Societies were included in the definition of Company. This subsequent inclusion of Cooperative Societies by a positive act of legislation is conclusive proof of the fact that the same were excluded in the earlier enactment. It is also to be noted that goodwill relates to businesses and not to legal entities. Therefore, when legal entities are merged and amalgamating entities extinguish, businesses continue under the surviving / amalgamated entity which derives benefit from such business in the form of all the assets, and liabilities vested as a result of merger/amalgamation.

57. For what has been discussed above on the issue, the claim of amortization of goodwill by the appellant in all the tax years under consideration is allowed.

LEVY OF SURCHARGE UNDER SECTION 4A

Tax Year 2011 – Ground No. 4 [ITA No. 132/KB/2015] [Taxpayer appeal]

58. Brief culled out from record are that the assessing officer through the amended assessment order has levied surcharge under section 4A of the Ordinance amounting to Rs. 1.655 million which was subsequently confirmed by the learned Commissioner IR Appeals through its appellate order passed for the tax year 2011.

59. The learned AR for the taxpayer argued at the outset that Section 4A was not applicable on Bank as the taxation of Bank is provided in Seventh Schedule, and unlike super tax levied under section 4B, (the chargeability of which has also been made part of Seventh Schedule), surcharge under section 4A was not made part of the Seventh Schedule, hence it was illegally levied on the Appellant. In support of the arguments, the AR placed reliance on a judgment passed by this Tribunal dated January 24, 2017, in ITA No. 697/KB/2012 wherein the Tribunal has held that Surcharge under section 4A is not applicable on income covered under Fifth Schedule. On a similar basis, the AR argued that surcharge is not applicable on Appellant Bank, being covered under the Seventh Schedule.

60. Without prejudice and in addition thereto, the learned AR further submitted that section 4A was inserted in the Income Tax Ordinance, 2001 vide Income Tax (Amendment) Ordinance, 2011 through which surcharge @ 15% was levied on income during the period 15-3-2011 to 30-6-2011. The learned AR also argued that the application of surcharge was to be made on income for the period March 15, 2011, to June 30, 2011 (falling in the tax year 2012) whereas the assessing officer levied a surcharge on the prorated income for 3.5 months for the tax year 2011.

61. The learned DR however supported the levy of surcharge on the ground that section 4A applies to all the taxpayers, and banks are no exception. Further, the SHC has confirmed the levy of surcharge which is applicable in this case also.

Findings:

62. We have considered the submissions of rival parties. We do not agree with the submissions of the learned AR that the surcharge under section 4A ibid was not leviable on the cases that fall under the Seventh Schedule to the Ordinance. This issue has already been decided by this Tribunal in favor of the Department through various decisions including the case of Faysal Bank Limited through judgment bearing ITA No. 823/KB/2012 dated 05-04-2017. Besides the aforesaid, the matter of proration of income for computation of surcharge has also been decided by Supreme Court in the case titled FBR through Chairman, Islamabad, etc Vs M/s Wazir Ali and Company, etc, (2020 PTD 1140). We, therefore, upheld the action of the assessing officer and dismiss the appellant’s appeal on this ground.

APPEAL EFFECT OF SET-ASIDE ISSUES / CIR(A)’S POWER TO REMAND BACK

Tax Year 2010 – Ground No. 2 [ITA No. 1453/KB/2018]

Tax Year 2010 – Ground No. 2 & 3 [ITA No. 1476/KB/2018]

Tax Year 2011 – Ground No. 2 [ITA No. 1454/KB/2018]

Tax Year 2011 – Ground No. 2 & 3 [ITA No. 1477/KB/2018]

Tax Year 2012 – Ground No. 2 & 3[ITA No. 1478/KB/2018]

Tax Year 2013 – Ground No. 2 to 4 [ITA No. 1274/KB/2018]

Tax Year 2013 – Ground No. 2 [ITA No. 620/KB/2018]

Tax Year 2013 – Ground No. 2 & 3 [ITA No. 1479/KB/2018]

Tax Year 2014 – Ground No. 2 to 7 [ITA No. 1691/KB/2018]

Tax Year 2014 – Ground No. 2 [ITA No. 1/KB/2019]

Tax Year 2015 – Ground No. 2 & 3 [ITA No. 795/KB/2018]

63. Through the above grounds of appeals, powers of CIR(A) to remand back the matter have been challenged. The AR also submitted that effect of set-aside issues is to be given in the light of the decision of the ATIR reported as 1997 PTD 1466 wherein this tribunal held that where the tax demand in respect of any issue is set-aside by CIR(A) or higher appellate authority, the assessing officer is required to pass an appeal effect order within the prescribed period and until the appeal effect order passed by the Department, the tax demand on that issue is not recoverable.

64. The AR apprised that the taxpayer Bank filed appeals on this ground for the reason that Department was neither giving effect to set-aside issues nor conducting the set-aside proceedings. Now, since all the issues (subject to set-aside proceedings) are in appeals before this ATIR (either in bank’s appeals or in Departmental appeals), therefore the appeals on this ground will be relevant to the extent of issues set aside by the ATIR if any.

65. As far as CIR(A)’s powers regarding set-aside is concerned, the learned AR referred to the order of Hon’ble High Court of Sindh in case of M/s. Fateh Textile Mills Limited reported as 2020 PTD 203 to denote that the terms set aside and annulment have the same meaning and effect.

Findings:

66. Undisputedly, the issues decided by the learned CIR(A) are in appeals before this tribunal through cross-appeals filed by the taxpayer as well as revenue department and the issues/matters have been discussed in detail above, Therefore, we are not inclined to dilate the legality/framework for set-aside proceedings. However, the revenue department is directed to give appeal effect of this order in accordance with law under section 124 of the Ordinance after giving the proper opportunity of being heard to the taxpayer and in the light of the directions given by this tribunal in the decision reported as 1997 PTD 1466 in respect of set-aside matters.

ADJUSTMENT OF BROUGHT FORWARD LOSSES

Tax Year 2014 – Ground No. 3 & 9 [ITA No. 317/KB/2018]

Tax Year 2015 – Ground No. 2 [ITA No. 742/KB/2018]

Tax Year 2016 – Ground No. 8 [ITA No. 1031/KB/2019]

67. The taxpayer Bank has suffered losses in the tax years 2010 to 2013 adjustment of which was claimed in tax years 2014 to 2016. The Department has not allowed the said adjustment on the ground that the losses are not verifiable. The CIR(A) has been directed to allow the adjustment of these losses after necessary verification in the tax year 2014 and 2016 whereas in the tax year 2015, the CIR(A) has confirmed the disallowance. Bank has filed appeals in tax years 2015 and 2016 whereas Department has filed an appeal in the tax year 2014.

68. The AR during the hearing agreed that the brought forward losses, if any, may be recomputed after giving effect to the order of this tribunal.

69. The DR on the other hand, supported the action of the assessing officer by stating that losses have been disallowed after examination of details during the amendment of assessments.

Findings:

70. Since both the parties are in appeals, we, therefore, consider it appropriate to direct the assessing officer to recompute the income in the relevant tax years in the light of directions given in this order, and if the loss arises in any tax year, the effect of such loss should be given in subsequent year(s) as per law after providing a proper opportunity of being heard to the taxpayer.

DONATIONS

Tax Year 2014 – Ground No. 4 [ITA No. 317/KB/2018]

Tax Year 2015 – Ground No. 5 [ITA No. 742/KB/2018]

Tax Year 2017 – Ground No. 8 [ITA No. 1032/KB/2019]

71. Briefly, the assessing officer through the amended assessment orders passed for tax years 2014, 2015, and 2017 disallowed donations paid under section 61 of the Ordinance. The AR, at the outset, contended that the issue does not fall within the limited scope of section 122(5A) of the Ordinance and placed reliance on the decision of the larger Bench of this tribunal in a case titled Meezan Bank reported as 113 TAX 53. Without prejudice to that, the AR stated that under the Seventh Schedule, profits as per accounts are taxable. The donation paid by the bank is charged to the accounting profit and since it has not been specified as an adjustment (under rule 2), therefore it is allowed as per accounts. In support, the AR placed reliance on the Judgment of this Tribunal in the case of the National Bank of Pakistan in ITA No. 394/KB/2006 dated 24-11-2016. The relevant extract is reproduced below for ease of reference:

“16.4 Having considering the rival arguments, we are of the view that all judgments stated supra relate to the banking industry and have not been overruled by the Superior Courts to date. Therefore, discrimination cannot be made between the taxpayers having similar facts and circumstances in the same business covered under the Seventh Schedule. Therefore, bank's appeals are allowed on these grounds in all the tax years, the officer is directed to allow the expenditure claimed on grounds of appeal No. 2 and 4 for the tax year 2009 and ground of appeal No. 3(1),(b) and (c) for the tax year 2010 as such additions do not relate to issues falling under Rule (1)(a) to (h).”

72. The DR supported the action of the taxation officer and stated that the officer has disallowed the Donation expense after examination of proper facts.

Findings:

73. After perusing the arguments of rival parties, we agree with the contention of the AR for the taxpayer that the issue relating to the examination of details does not fall within the scope of Section 122(5A) as held by the larger bench in case of Meezan Bank Limited. Besides the matter of jurisdiction, on merit, the issue has also been decided in the taxpayer’s favor in the case of the National Bank of Pakistan (ITA No. 394/KB/2006 dated 24-11-2016). We, therefore, following the said judgment of the Tribunal, decide the appeal on this score in favor of Appellant Bank.

PROVISION AGAINST OTHER ASSETS

Tax Year 2015 – Ground No. 6 [ITA No. 742/KB/2018]

74. The Department disallowed provision against other assets amounting to Rs. 7.684 million (as per Note 30 of the Accounts) for the tax year 2015 under Rule 1(g) read with Section 34(3) of the Ordinance.

75. The AR submitted that under the Seventh Schedule, any charge/expense in the accounts cannot be disallowed on the touchstone of ‘accrual basis’ of accounting or on account of being provisional in nature. The Seventh Schedule specifies the adjustments allowed to be made to the profits declared in the accounts, and except for the adjustments specified, no other adjustments can be made. The adjustments specified do not include a provision against other assets. Under the Seventh Schedule, expenditure cannot be disallowed on the ground that the expenditure in the view of the assessing officer, is not made under the accrual basis of accounting, being provisional in nature. If the assessing officer was allowed to apply and test the applicability of section 34 under the regime of the Seventh Schedule, then it would have otherwise been specifically stated. The explanation added under Rule 1(g) further confirms that section 34 is otherwise not applicable under the Seventh Schedule. It is also pertinent to mention that Rule 2(1) provides to disallow expenditure outstanding for more than 3 years, which was otherwise not allowable under section 34(5) of the Ordinance. Further, the mechanism for allowing subsequent payment as stated in sub-rule (2) of Rule 2, parametria to section 34(5A) and (6) of the Ordinance. It is clear from these stipulations that the law in its wisdom has referred to ‘certain’ [and not all] provisions of section 34, applicable under the regime of Seventh Schedule, and for that purpose, specific rules have been framed in the Seventh Schedule.

76. The AR also drawn attention towards judgments of this Tribunal reported as 2012 PTD 1055, 2013 PTD 246, 109 TAX 85, 107 TAX 248 and unreported judgments in case of NBP (ITA No. 394/KB/2006), Faysal Bank (ITA No. 823/KB/2012), UBL (ITA No. 324/KB/2011) and MCB (ITA No. 2162/LB/2017). Relevant extracts in this respect are reproduced below for ready reference:

i. 109 TAX 85:

“The learned AR has rightly pointed out that Department in its comments before the learned CIR(A) and the learned DR in his submissions has admitted that in the decision reported as; 12 PTR 124 (Trib) and 2011 PTR 222 (Trib) the plea of the banking companies that accounts prepared for SBP for the purposes of the schedule read with section 100A of the Ordinance have sanctity and department is under obligation to accept those accounts. Respectfully following the decisions of this Tribunal, we also hold that the respondent Department is under obligation to accept the accounts prepared by the appellant for the purposes of 7th Schedule of the Income Tax Ordinance, 2001”.

ii. 107 TAX 248:

10. Provision against other assets

The learned AR submitted that this issue has also been decided in favour of banks by this Tribunal in (2005) 91 Tax 484 (Trib.), ITA No.1012 and 1014/IB/1995 dated 18-7-2006 and recently in (2012) 106 Tax 317 (Trib.)=(2012) PTR 124 (Trib.). The DR repeated the arguments recorded by the Taxation Officer and observations of the Commissioner of Appeals for Tax Years 2008 to 2010.

We have examined the case-law cited by the AR. These cases mentioned by him apply squarely apply to controversy in hand. Accordingly, by following our earlier judgments and reasons contained therein in detail, we adjudicate this issue in favour of the bank.

iii. ITA No. 823/KB/2012 – Faysal Bank

“33. In furtherance to our views and considering the binding judgments stated supra relating to the banking industry which have not been overruled by the Superior courts to date, we direct to allow provisions against diminution in value of an investment and other assets. As per the law of justice and fair play discrimination cannot be made between the taxpayers having similar facts and circumstances in the same business covered under the Seventh Schedule…….”

77. The DR stated that the officer has rightly disallowed the claim being provisional in the absence of related supporting details which was rightly upheld by CIR(A).

Findings:

78. Submissions of both parties have been considered and record perused. The issue beforehand has already been decided in Bank’s favor through various judgments (quoted supra). We, therefore, following the above-referred judgments of the Tribunal decide the issue in favor of the taxpayer Bank.

ASSETS ACQUIRED IN SATISFACTION OF CLAIM

Tax Year 2015 – Ground No. 9 [ITA No. 742/KB/2018]

Tax Year 2016 – Ground No. 3 [ITA No. 1225/KB/2019]

Tax Year 2017 – Ground No. 3 [ITA No. 1226/KB/2019]

79. Briefly, the assessing officer taxed the reversal/income relating to assets acquired on the satisfaction of the claim.

80. In the tax year 2015 CIR(A) decided the issue in favor of the Department. However, in the tax years 2016 and 2017, CIR(A) decided the issue in favor of taxpayer Bank; hence cross-appeals.

81. The learned AR for the taxpayer apprised that reversal arising out of assets acquired in satisfaction of claim is also similar to normal reversal, and taxation of such reversal is double taxation if provision thereof is also disallowed / not allowed owing to 1% and 5% restriction. The AR further informed that CIR(A) after examining the facts has rightly deleted the tax demand in tax years 2016 and 2017 and accordingly prayed for annulment of tax demand in the tax year 2015.

82. The learned DR on other hand, supported the order passed by the assessing officer by stating that since the provision has been allowed to the bank, reversal of provision is taxable.

Findings:

83. Submissions of both the rival parties have been considered and perused the record. It is a settled principle that if provisions are allowed, its reversal is taxable. It is however observed that the issue has not been thrashed out properly by the authorities below. Therefore, for the sake of justice, we remand back the matter with direction to re-examine the facts whether the original provision was claimed/allowed to the taxpayer or not. If the provision was not allowed, then reversal thereof cannot be taxed. The appeals are accordingly disposed of.

LEVY OF SUPER TAX UNDER SECTION 4B

Tax Year 2015 – Ground No. 10 [ITA No. 742/KB/2018]

84. The learned AR for the taxpayer without dilating into the constitutional validity of levy (which is pending in Supreme Court) stated that the assessing officer has not allowed the adjustment of brought forward losses against the taxable income under section 4B. Since the amendment made in section 4B through Finance Act, 2016 (to exclude the adjustment of brought forward losses against taxable income for the purpose of section 4B) is applicable from the tax year 2016 and onwards, therefore the effect of brought forward loss should be allowed while computing Bank's income (for the purpose of section) in the tax year 2015.

Findings:

85. The constitutional validity of super tax has already been upheld by almost all the High Courts of the country, hence, appeal on this score fails. However, as far as the question of adjustment of brought forward loss is concerned, the assessing officer is directed to allow the adjustment of the same in the tax year 2015 as per law (after allowing the appeal effect to the directions given in the Appellate Order) as the amendment to that effect through Finance Act, 2016 (for not allowing adjustment of brought forward loss) is applicable from the tax year 2016 and onwards.

TURNOVER FOR THE PURPOSE OF MINIMUM TAX UNDER SEC 113

Tax Year 2010 – Ground No. 5 [ITA No. 1083/KB/2015]

Tax Year 2010 – Ground No. 3 [ITA No. 1263/KB/2015]

Tax Year 2012 – Ground No. 4 [ITA No. 133/KB/2012]

Tax Year 2012 – Ground No. 10 [ITA No. 298/KB/2015]

Tax Year 2013 – Ground No. 5 [ITA No. 1274/KB/2018]

Tax Year 2014 – Ground No. 4 [ITA No. 112/KB/2018]

Tax Year 2015 – Ground No. 11 [ITA No. 742/KB/2018]

86. Through the Grounds of Appeal, the AR for the taxpayer contested the definition of turnover for the purpose of minimum tax under section 113 of the Ordinance. The AR argued that the assessing officer while levying minimum tax under section 113 has erred in considering the following income being turnover:

(i) Interest / mark-up income;

(ii) Dividend Income;

(iii) Capital Gains on sale of securities; and

(iv) Unrealized gain on revaluation of investment;

At the outset, the AR drew attention to sub-section (3) of Section 113 of the Ordinance wherein “turnover” has been defined as under:

(3) In this section, “turnover” means –

(a) the gross receipts, exclusive of sales tax and Federal excise duty or any trade discounts shown on invoices or bills, derived from the sale of goods;

(b) the gross fees for the rendering of services or giving benefits, including commissions;

(c) the gross receipts from the execution of contracts; and

(d) the company’s share of the amounts stated above of any association of persons of which the company is a member.

The AR argued that explanation of the term ‘turnover’ is exhaustive, however, a plain reading of the law suggests that minimum tax is payable only on turnover representing:

· supply of goods

· rendering, giving, or supplying services or benefits

· execution of contract

87. The AR further stated that ‘turnover’ for the purposes of section 113 has to be used in the context laid down in the law and not in accounting, commercial or general parlance. If such concepts were required/intended to be used then there was no need for specific application and ‘only’ the term turnover would have sufficed.

88. The learned DR on the other hand supported the decision of the learned CIR(A) and argued that the issue has already been decided in favor of the Department by the High Court of Sindh in case of M/s. First Women Bank reported as 2010 PTD 1245 followed by various un-reported decisions of the Tribunal.

89. As far as Department’s appeal for the tax year 2012 is concerned, the AR stated that the assessing officer erred in considering the share of profit from associate being part of turnover for the purpose of computation of minimum tax under section 113 of the Ordinance, which is contrary to the finding of the assessing officer in the body of order (para 4.3, page 16 of assessment order) and CIR(A) has rightly directed to exclude the share of profit from an associate from the levy of Minimum Tax.

Findings:

90. We have heard both parties at length on the issue. It is pertinent to mention here that the Hon’ble High Court through judgment reported as 2010 PTD 1245 has already decided the issue in favor of the Tax Department. The said judgment has also been followed in later decisions of Tribunal including the recent judgment of ATIR in ITA No. 1508/KB/2015 dated 08-04-2021 in case of M/s. Faysal Bank Limited.

91. We, therefore, do not find any hesitation to state that the Assessing Officer’s action was as per law and was rightly upheld by the learned CIR(A) by placing reliance on the judgments of superior courts. The appeals of the taxpayer on these grounds are dismissed accordingly.

92. Regarding the Department’s appeal for taxing share of profit from associate being turnover, we agree with the findings of the Commissioner Appeal to exclude the same from a turnover as corresponding income which has also been admitted by the assessing officer on page no. 16 of the order dated August 4, 2014. Order accordingly.

SINDH WORKERS WELFARE FUND

Tax Year 2016 – Ground No. 4 [ITA No. 1031/KB/2019] [Taxpayer appeal]

Tax Year 2017 – Ground No. 4 [ITA No. 1032/KB/2019] [Taxpayer appeal]

93. The facts are that the assessing officer through the amended assessment order passed under section 122(5A) disallowed the charge of Sindh WWF (SWWF) of Rs. 63.474 million and Rs. 67.799 million for the tax year 2016 and 2017, respectively under Section 61A of the Ordinance on account of non-payment of WWF liability.

94. The learned AR informed that the provision of SWWF was recognized in the Books as per the Sindh Workers Welfare Fund Act, 2014; hence is not a mere provision. The AR submitted that SWWF is an allowable deduction under section 60A of the Ordinance read with the 18th amendment to the Constitution of Pakistan and the General Clauses Act, 1897. The AR stated that the claim of SWWF is allowable as a business expense under section 20 of the Ordinance as the sanctity is provided to the accounting profit as per accounts prepared for SBP under the Seventh Schedule read with section 100A of the Ordinance and the adjustment does not fall under Clause (a) to (h) of Rule 1 to Seventh Schedule. Needless to say, FBR in its Circular No. 17 of 2004 has clarified that deductible allowances being WPPF / WWF were allowable as a business expense.

95. In respect of the Department’s contention to disallow SWWF under Section 60A on non-payment, the AR informed that there are various decisions of appellate authorities for allowing the claim of WPPF / WWF on an accrual basis including decisions of ATIR reported as 2012 PTD 790 and 2015 PTD 386. The FBR through Circular No. 01 of 2004 dated January 3, 2004, itself clarified that the allowability of Worker Welfare Fund as a deductible allowance would depend on the method of accounting being employed by the taxpayers.

96. The AR further argued that since the Hon’ble SHC has granted stay against the payment of SWWF, it was no longer a commercial discretion of the Appellant to withhold the payment. The directions of the Court being special in nature should prevail over the general provisions of the Ordinance. In support, the AR referred to the decision of Appellate Tribunal Inland Revenue (ATIR) reported as 92 TAX 321.

97. In view of the above, the AR prayed for allowing the claim of SWWF. Whereas, the DR on other hand supported the order passed by CIR(A).

Findings:

98. We have heard the arguments of both parties. The submissions made on behalf of the appellant taxpayer have no substance. We tend to agree with the findings of the learned CIR(A). The learned Commissioner Inland Revenue (Appeals) has aptly discussed all aspects of the case in detail. The appellant has failed to point out any legal or factual infirmity in the impugned appellate order and has not put forth any documentary or material evidence to rebut the observations and findings of the learned Commissioner (Appeals). We find no infirmity in the impugned order of the learned Commissioner (Appeals) and do not feel persuaded to interfere with the treatment meted out by the first appellate authority. Accordingly, the impugned order is maintained on the said issue and the appeals under reference are dismissed being devoid of merit.

ACTUARIAL LOSS DISALLOWED BEING PROVISION

Tax Year 2016 – Ground No. 7 [ITA No. 1031/KB/2019] [Taxpayer appeal]

Tax Year 2017 – Ground No. 9 & 11 [ITA No. 1032/KB/2019] [Taxpayer appeal]

99. The Assessing officer through the order disallowed the Bank’s claim of actuarial loss of Rs. 9.670 million and Rs. 56.991 million on account of actuarial loss on re-measurement of defined liability under section 34(3) of the Ordinance.

100. The AR at the outset submitted that the Actuarial loss claimed by the Bank is an ascertained liability as the same is determined by the Actuary by employing the scientific methods. The AR further stated that the amount was duly paid by the Bank after the end of the year, which is evident from note 35.5 to the audited accounts for the years ended December 31, 2016, and December 31, 2017.

The AR further argued that under the Seventh Schedule, any charge/expense in the accounts cannot be disallowed on the touchstone of ‘accrual basis’ of accounting or on account of being provisional in nature. The Seventh Schedule specifies the adjustments allowed to be made to the profits declared in the accounts, and except for the adjustments specified no other adjustments can be made. The adjustments specified do not include actuarial losses. Under the Seventh Schedule, expenditure cannot be disallowed on the ground that the expenditure in the view of the assessing officer, is not made under the accrual basis of accounting, being provisional in nature. If the assessing officer was allowed to apply and test the applicability of section 34 under the regime of the Seventh Schedule, then it would have otherwise been specifically stated. The explanation added under Rule 1(g) further confirms that section 34 is otherwise not applicable under the Seventh Schedule. It is also pertinent to mention that Rule 2(1) provides to disallow expenditure outstanding for more than 3 years, which was otherwise not allowable under section 34(5) of the Ordinance. Further, the mechanism for allowing subsequent payment as stated in sub-rule (2) of Rule 2, para materia to section 34(5A) and (6) of the Ordinance. It is clear from these stipulations that the law in its wisdom has referred to ‘certain’ [and not all] provisions of section 34, applicable under the regime of Seventh Schedule, and for that purpose, specific rules have been framed in the Seventh Schedule.

101. The AR also stated that in view of the above facts the issue has already been decided in favor of banks through various decisions of ATIR including the decision in the case of Meezan bank (113 TAX 53), HBL (109 TAX 85), MCB (ITA No. 2162/LB/2017, NBP (ITA No. 394/KB/2006), relevant extracts of which are reproduced below for ready reference:

i. ITA no. 394/KB/2006 – NBP

7.3 Further we strongly believe that Actuary is a professional whose qualification cannot be ignored as it is a specialized field and for acquiring the professional qualification the prescribed examination is very difficult to clear. For this reason, we have a very limited number of Actuaries available. The expertise, certification, and working of the actuary in the absence of any sound reasoning cannot be ignored.

7.5 We would also like to comment that the officer has made addition on the basis of a plain reading of Section 34(3) of the Income Tax Ordinance 2001 which prescribes two conditions;

i) That events that determine the liability have occurred, and

ii) That amount of liability can be determined with reasonable accuracy.

These two legal conditions require an in-depth study of accounting entries relating to each employee whose retirement benefits are under consideration. We are sorry to say that no such exercise has been carried out by the officer and he has summarily discarded the actuarial report of an expert.

7.7 Respectfully following the numerous judgments of High Courts as well as the Division Bench of ATIR including the order in appellant taxpayer Bank’s own case we find no reason to deviate from these rulings. The appeals of the tax department fail on these grounds……..”

ii. 113 TAX 53 – Meezan Bank

“After going through the above portion of the notice we have no hesitation in inferring that such type of inquiries are not permissible under section 122(5A) and come within the ambit of fishing and roving enquires. Moreover, the provision of law on which inference has been drawn i.e. sections 32 and 34 (3) of the Income Tax Ordinance, 2001 were not even confronted to the appellant. Furthermore, the officer has not gone into the detailed accounting entries. In order to see that all events which determine the liability have occurred one has to see accounting entries related to various employees to whom gratuity is payable and also those accounting entries which were related to compensated absences in respect of various employees. In order to ascertain that events have not yet occurred accounting entries related to subsequent periods are required to be seen along with original accounting entries passed at the time of booking of accrued expenses and the appellant should have been confronted with the defect detected as a result of the examination. For example, if the expense of gratuity in respect of employees or in respect of compensated absence has been claimed on an accrual basis detail of this should have been compared when actual payment was made in subsequent period in respect of employees, then it could be established that event has not occurred in respect of certain employees. We do not see such exercise carried out by officer so the action is not sustainable”.

iii. 109 TAX 85 – HBL

Regarding the disallowance of Rs.400,276,000/‐ under section 21(e), (f) and 34(3) on account of post-employment medical benefits plan it has been contended that accounts of the appellant bank are maintained on a mercantile basis therefore every year certain contributions are made to the employees' retirement medical benefits plan as an ascertained liability. The Additional Commissioner vide his notice under section 122(9) relevant portion duly reproduced on page 36 of his order confronted the appellant for disallowance of Rs.162,985,000/‐ on account of retirement medical benefits. However, after considering the reply of the appellant has proceeded to disallow a sum of Rs.400,276,000/‐ This addition is not maintainable for the simple reason that the appellant was never confronted for the addition of Rs.400,276,000/‐. It has further been contended that similar disallowances have been declared by this Tribunal in its decision reported as 2012 PTD 1055=2011 PTR 222 as allowable deductions.

102. The AR on alternative grounds also stated that following the claim on an accrual basis, the Bank has itself offered the actuarial gain in subsequent tax years.

103. The DR on the other hand supported the action of the assessing officer and stated that the claim being provisional in nature is not allowable as per the strict reading of the law.

Findings:

104. Arguments heard and record perused. We have noted that both the authorities below have failed to consider the actuarial report on the basis whereof the appellant taxpayer has claimed the actuarial loss. We are of the considered view that it has to be first determined and ascertained the exact actuarial loss and thereafter it has to be seen that according to the taxpayer, it has offered to tax the actuarial gain in the subsequent tax years as well. It has also to be seen that according to the appellant, it has otherwise paid an amount of actuarial losses to the retirement fund, as identified in Note 35.5 to the audited financial statements for the years ended December 2016 and December 2017. With the aforesaid observations, this issue is remanded back to the assessing officer for de-novo consideration. The assessing officer is directed to pass a speaking order after considering the judgments passed by this tribunal on the issue and after giving the proper opportunity of being heard to the taxpayer. Order accordingly.

CREDIT OF MINIMUM TAX PAID (MORE THAN NORMAL TAX) NOT ALLOWED

Tax Year 2016 – Ground No. 9 [ITA No. 1031/KB/2019] [Taxpayer appeal]

105. In the return of income filed for the tax year 2016, the taxpayer Bank adjusted brought forward minimum tax aggregating to Rs. 203.263 million against corporate tax liability. The said adjustment was disallowed by the officer on the following grounds:

(i) Brought forward minimum tax relates to the year where corporate tax liability was Nil. Hence carry forward such minimum tax is not allowable in light of the decision of Hon’ble Sindh High Court in case of M/s. Kassim Textile Mills (Pvt) Ltd reported as 2013 PTD 1420; and

(ii) After the amendment of assessment in respective years, no minimum tax liability exists, which can be carried forward.

106. In respect of (i) above, the AR stated with due respect that principally they do not agree with the aforesaid decision of Hon’ble High Court (regarding carrying forward of minimum tax liability in the absence of Corporate Tax liability), as the said decision has not yet availed finality and is subject to the final decision of Supreme Court. On facts the AR informed that as per the return of income e-filed, the Bank is eligible to adjust minimum taxes being in excess of tax liability for the relevant year, as under:

Tax Year	Minimum Tax	Tax payable by Bank	Excess of minimum tax carried forward (adjusted in the tax year 2016)
	------------------------- Rs. in million -------------------------

2012	47.769	2.043	45.726*
2013	34.198	16.337	17.861
2014	77.708	29.329	48.379
2015	122.201	47.242	74.959
Total	281.876	94.951	186.925

* Rectification application filed vide letter AT 3037 dated January 30, 2020.

The AR informed that in view of the above-mentioned facts, the implication of SHC’s decision in case of M/s. Kassim Textile Mills is otherwise not applicable.

107. In respect of (ii) above, the AR informed that after the appeal effect of CIR(A)’s directions in tax years 2012 to 2014 minimum tax liability are still higher than the corporate tax liability in these years. Moreover, the final outcome of these assessments is subject to the decision of the Tribunal on various issues in subject appeals. The AR, therefore, prayed for directions for re-computation of liability after allowing appeal effect to the directions of appellate authorities.

108. The DR re-iterated the contentions of the assessing officer by stating that minimum tax was not allowable to be carried forward as per the amended position at the time of amendment proceedings for the tax year.

Findings:

109. We have heard both parties at length. Department contends that minimum tax is not allowable owing to loss in light of the decision of Hon’ble High Court in the case of Kassim Textile Mills and that no minimum tax is available to be brought forward owing to the amendment of assessment in prior years. As far as the decision of the High Court is concerned this Bench does not find it appropriate to divulge into the matter as the issue is decided by higher authority and is pending before the Hon’ble Supreme Court. The AR, however, rebutted that the bank has claimed differential of minimum tax carried forward over corporate tax liability as per return in said years, and the Bank’s rectification application for the tax year 2012 is also pending. Since this matter involves factual controversy, and the income, as well as tax liability, is to be recomputed in the light of issues being decided in this order, the assessing officer is directed to provide the adjustment of minimum tax if available after allowing appeal effect and considering taxpayer’s claim as per return/rectification application on merit as per law.

PROVISION AGAINST DIMINUTION IN VALUE OF INVESTMENT

Tax Year 2016 – Ground No. 2 [ITA No. 1225/KB/2019] [Dept appeal]

Tax Year 2017 – Ground No. 2 [ITA No. 1226/KB/2019] [Dept appeal]

110. The deductions claimed under the head ‘provision for diminution in the value of investment’ were disallowed by the assessing officer in terms of Rule 1(g) of the Seventh Schedule on a premise that such adjustments were made on account of the application of International Accounting Standards [‘IAS’] 39 & 40. Later, on an appeal before CIR(A), the learned CIR(A) has deleted the disallowance for the tax years under consideration; hence, these appeals.

111. In this respect, the AR apprised that back in April 2001, the International Accounting Standards Board [‘IASB’] adopted IAS 39 & 40 to replace IAS 25 Accounting for Investments which was issued in March 1986. This position was also confirmed by the Institute of Chartered Accountants of Pakistan [‘ICAP’] to its members vide Circular No. 11/2001 dated September 29, 2001, and subsequently, ICAP also withdrew TR-23 Accounting for Investments. However, owing to the difficulties being faced by banking companies and upon the recommendation of ICAP, the State Bank of Pakistan [‘SBP’] has deferred the implementation of IAS 39 & 40 till further instructions through BSD Circular Letter No. 10 dated August 26, 2002.

112. After the deferment of IAS 39 & 40, as explained above, the SBP issued BSD Circular No. 10 of 2004 dated July 13, 2004 (still in the field) under which the banking companies are required to revalue their investment portfolio. Thus, it was in terms of the said notification that the diminution was charged to the profit & loss account and not due to the application of IAS 39 or 40, which remained inapplicable on the banking companies.

113. The learned AR submitted that this is a settled issue in the banking companies that after the applicability of the Seventh Schedule from the tax year 2009 onwards, the tax department is bound to accept the balance of income as per audited accounts submitted to the State Bank of Pakistan. The only additions/adjustments could be made as mentioned in Rule 1(a) to (h) of the seventh schedule. The accounts prepared for SBP for the purpose of Schedule read with section 100A of the Ordinance have sanctity has been upheld and reinforced time and again by superior authorities through various decisions/judgments including 2012 PTD 1055 and 2012 PTR 124. Relevant extracts of judgment 2012 PTD 1055 in this regard are reproduced below for ready reference:

“The above observations of Commissioner of Appeals are untenable. Section 100A read with Seventh Schedule to the Ordinance is a special non-obstante provision that overrides all other provisions as far as computation of income and tax payable by the banking companies is concerned. Tax authorities are bound to accept the audited accounts from the tax year 2009 in the case of banks subject to specified additions and adjustments. This position of law has also been admitted and explained by F.B.R in para 10 of its Circular No. 1 of 2007 dated 2-7-2007, Circular no.2 of 2008 dated 28-2-2008, Circular no .3 of 2009 dated 17-7-2009, and Circular no. 8 of 2009 dated 25-9-2009. These instructions are strictly as per law having binding force for all subordinate tax officials under sections 206 (2) and 214(1) of the Ordinance. In the presence of unambiguous position of law and legally binding instructions, the Deputy Commissioner was bound to accept the balance of the income as per audited accounts subject to additions/adjustments mentioned in rule 1(a) to (h) of the seventh schedule, on the basis of misinterpretation of Rule 9 of the Seventh Schedule, as elaborated above, the authorities below concluded that the seventh schedule is not a self-contained provision as far as computation of income is concerned in the case of banking companies. We disapprove of this interpretation and hold that for computation of income of the banking companies, the Seventh Schedule to the Income Tax Ordinance, 2001 provides a rule for computation of the profits and gains of a banking company and tax payable thereon. From tax year onwards, a banking company's as disclosed in the annual accounts furnished to the State Bank of Pakistan, subject to specified adjustments, shall be taken as "income from business". Rule 9 in no way can be interpreted to unsettle this requirement laid down by the legislature. It applies for things not provided for in the Seventh Schedule”.

114. The AR also drawn attention towards the judgment of Tribunal reported as 2012 PTD 1055, 2013 PTD 246, 109 TAX 85 and 107 TAX 248 and unreported judgments of Tribunal in case of NBP (ITA No. 394/KB/2006), Faysal Bank (ITA No. 823/KB/2012), UBL (ITA No. 324/KB/2011) and MCB (ITA No. 2162/LB/2017). Relevant extracts are reproduced from the said judgments reproduced below for ready reference:

109 TAX 85:

107 TAX 248:

We have examined the case law and arguments of both sides. Case law relied by learned DR relates to the position of law prior to insertion of Seventh Schedule to the Ordinance. This Tribunal in (2012) 106 Tax 317 (Trib.)=2012 PTR 124 (Trib.) confirmed addition under this head for the years prior to insertion of the Seventh Schedule but allowed impairment losses. However, in earlier judgments reported as 2012 PTD (Trib.] 1055 = 2011 PTR 222 (Trib.) and (2012) 106 Tax 317 (Trib.)=2012 PTR 124 (Trib.) detailed discussion has been made with reference to the admissibility of this deduction under the Seventh Schedule to the Ordinance. By following our earlier judgments, we order the deletion of these additions as years involved are after amendment in law rendering the decisions relied on by the Department as no longer applicable.

ITA No. 823/KB/2012 – Faysal Bank

115. The DR on the other hand referred to the unreported decision of the Tribunal in the case of M/s. Askari Bank dated 24-07-2019 in ITA No. 452/IB/2018 wherein the ATIR confirmed the disallowance of provisions for diminution in value of an investment being notional. The DR also referred to the amendment introduced in Rule 1(g) through Finance Act, 2017 read as under:

Explanation.─ For removal of doubt, it is clarified that nothing in this clause shall be so construed as to allow a notional loss or charge to tax any notional gain on any investment under any regulation or instruction unless all the events that determine such gain or loss have occurred and the gain or loss can be determined with reasonable accuracy.

116. In response to the above, the AR rebutted that in the case of M/s. Askari Bank the Tribunal confirmed the disallowance by stating that in the absence of IAS 39 & 40, provisions of IAS 25 were still applicable. The learned AR argued that the Hon’ble members of tribunal in case of M/s. Askari Bank was not properly assisted about the applicability of IAS 25 as IAS 25 was replaced in March 1986 and IAS 39 and 40 are still not enforced by SBP for Banks.

117. Regarding the departmental assertion that such adjustment is covered by ‘Explanation’ introduced in Rule 1(g) through Finance Act 2017, the AR submitted that the scope of such Explanation would be subservient to Rule 1(g). That is, the same would be limited to the adjustments arising out of the application of IAS 39 & 40. Had the intention of the Legislature to give the ‘Explanation’ an overriding effect, such provisions would have been introduced as a separate/distinct rule and not as an Explanation.

Findings:

118. The arguments of rival parties have been considered. We have also perused the relevant judgments of Tribunal relied upon by the AR and DR as well as the amendment made in Rule 1(g) to Seventh Schedule through Finance Act, 2017 referred by the DR. There is no doubt that the issue through the majority of decisions of Tribunal has been decided in taxpayer’s favor on the ground that the provision is not based on the application of IAS 39 and IAS 40 as provided under Rule 1(g). In respect of contention of DR regarding the applicability of IAS 25 as pointed in case of M/s. Askari Bank, the submissions of learned AR that the said IAS 25 being replaced in March 1986 was also not applicable, found in order. In support, the AR provided the copy of relevant extracts of IAS along with a copy of relevant circulars issued by the Institute of Chartered Accounts of Pakistan (ICAP) and State Bank of Pakistan, which have been placed on record. Accordingly, the appeals of the department are rejected on the instant issue.

WORKERS WELFARE FUND (WWF)

Tax Year 2009 – Ground No. 4 & 5 [ITA No. 1082/KB/2015] [Taxpayer appeal]

Tax Year 2012 – Ground No. 5, 6 & 7 [ITA No.133/KB/2015] [ Taxpayer appeal]

Tax Year 2013 – Ground No. 4, 5 & 6 [ITA No. 899/KB/2014] [Taxpayer appeal]

119. We have heard the arguments of both parties and have also perused the record of the case. By virtue of amendments made through Finance Acts 2006 and 2008 in the WWF Ordinance, the appellant was liable to pay WWF. The vires of these amendments were challenged before different High Courts by the taxpayers. The Full Bench of the Hon’ble Sindh High Court in the case titled as M/s Shahbaz Garments (Pvt.) Ltd Vs Pakistan (2013 PTD 969), after exhaustively examining the law adjudged the impugned levy to be a tax and, therefore, validated the introduction and enactment thereof through a Money Bill. The Hon’ble Lahore High Court, on the other hand, in Pakistan Chrome Tannery’s case reported as (2011 PTD 2643) and M/s Azgard Nine Ltd, v. Pakistan through Secretary and others” PLD 2013 Lahore 282, has declared the impugned levy, made through the amendments in the WWF Ordinance of 1971 vide the Finance Acts, 2006 and 2008 as a fee and not a tax, and thus struck down the legislation as being ultra vires. The Peshawar High Court, through judgment dated 29-05-2014 in Associated Industries Limited, Amangarh Industrial Area, Nowshera and others v. Federation of Pakistan in W.P. No. 1425/2010, after discussing in detail the judgments of the Sindh High Court and the Lahore High Court and other precedent law, declared the amendments made through Money Bills as ultra vires.

However, finally, the amendments made through Finance Acts, 2006 and 2008 in the WWF Ordinance were taken into consideration and dilated upon by the Hon’ble Supreme Court of Pakistan in the case titled Workers Welfare Funds, M/s Human Resources Development, Islamabad and others Vs East Pakistan Chrome Tannery (Pvt.) Ltd and others (PLD 2017 SC 28) wherein the amendments were declared ultra vires. The relevant extract of the judgment is reproduced hereunder:-

“22. As we have established from the discussion above that none of the subject contributions/payments made under the Ordinance of 1971, the Act of 1976, the Act of 1923, the Ordinance of 1968, the Act of 1968, and the Ordinance of 1969 possess the distinguishing feature of a tax, i.e. a common burden to generate revenue for the State for general purposes, instead, they all have some specific purpose, as made apparent by their respective statutes, which removes them from the ambit of a tax. Consequently, the amendments sought to be made by the various Finance Acts of 2006, 2007, and 2008 pertaining to the subject contributions/ payments do not relate to the imposition, abolition, remission, alteration, or regulation of any tax, or any matter incidental thereto (tax). We would like to point out at this juncture that the word ‘finance’ used in Finance Act undoubtedly is a term having a wide connotation, encompassing tax. However, not everything that pertains to finance would necessarily be related to tax. Therefore, merely inserting amendments, albeit relating to finance but which have no nexus to tax, in a Finance Act does not mean that such Act is a Money Bill as defined in Article 73(2) of the Constitution. The tendency to tag all matters pertaining to finance with tax matters (in the true sense of the word) in Finance Acts must be discouraged, for it allows the legislature to pass laws as Money Bills by bypassing the regular legislative procedure under Article 70 of the Constitution by resorting to Article 73 thereof which must only be done in exceptional circumstances as and when permitted by the Constitution. The special legislative procedure is an exception and should be construed strictly and its operation restricted. Therefore, we are of the candid view that since the amendments relating to the subject contributions/ payments do not fall within the parameters of Article 73(2) of the Constitution, the impugned amendments in the respective Finance Acts are declared to be unlawful and ultra vires the Constitution.”

120. In view of the foregoing, by respectfully following the judgment of the Hon’ble Supreme Court of Pakistan, the appeals of the appellant taxpayer are accepted and the orders passed by the lower authorities are vacated/annulled on this issue.

121. For what has been discussed above, all the titled appeals are disposed of in the manner stated above.

122. This order consists of (60) pages and each page bears my signature.

--SD—

(M. M. AKRAM)

JUDICIAL MEMBER

--SD--

(DR. TAUQEER IRTIZA)

ACCOUNTANT MEMBER

M. M. Akram Reported Judgements

Pages

Monday, January 31, 2022

M/s. JS Bank Ltd., Karachi. Vs The CIR, Legal Zone, LTO, Karachi.

APPELLATE TRIBUNAL INLAND REVENUE (PAKISTAN)
SPECIAL BENCH, KARACHI

Donation.

4
5
8

317 / 2018
742 / 2018
1032 / 2019

2014
2015
2017

Department
Bank
Bank

9

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Pages

Monday, January 31, 2022

M/s. JS Bank Ltd., Karachi. Vs The CIR, Legal Zone, LTO, Karachi.

APPELLATE TRIBUNAL INLAND REVENUE (PAKISTAN)SPECIAL BENCH, KARACHI

Donation.

458

317 / 2018742 / 20181032 / 2019

201420152017

DepartmentBankBank

9

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APPELLATE TRIBUNAL INLAND REVENUE (PAKISTAN)
SPECIAL BENCH, KARACHI

4
5
8

317 / 2018
742 / 2018
1032 / 2019

2014
2015
2017

Department
Bank
Bank